The New, New HP: Infrastructure In, Consumers Out

We'll remember the third week of August, 2011, as one of those epic turning points in computing history--mobile for sure, but also personal and enterprise. Whether that week indeed marks the beginning of the "post-PC era," as many pundits claim, is still open to debate. But the week started with Google spending eight figures to buy a mobile hardware manufacturer--and ended with the grand dame of Silicon Valley crying "uncle," not only in the mobile arena but also in the consumer business writ large. Within a matter of days, the PC, mobility, and communications landscapes looked quite different.

It's hard to say which was the bigger news out of HP's earnings announcement--its utter capitulation in the PC market to the dual onslaught of commodity price erosion and tablet demand attrition, or the dizzying about-face on its recently released tablet and mobile devices in general. Yet both decisions share a common theme: The new, new HP, the Leo Apotheker edition, wants nothing to do with consumer products.

The charitable interpretation is that these are just the latest, logical moves in Apotheker's grand strategy to transform HP into an IT infrastructure, enterprise software, and services powerhouse, a la IBM. HP would be the Avis to Big Blue's Hertz. Good luck with that one, since IBM has about a five-decade head start. But maybe Blue Junior will try harder.

The psychoanalytical interpretation is that HP's Teutonic savior is just reverting to what he knows. With a career spent selling overpriced software to C-level movers and shakers, one can understand how this whole retail business, peddling low-margin information toasters to rubes doing back-to-school shopping in the local big-box store, can seem more than a bit baffling.

In either case, the move is made. HP is going all in with an infrastructure bet--to be a pick-and-shovel supplier to the cloud prospectors.

What does this mean for IT? If you're a large-enterprise CIO, with a shallow bench of IT talent, it means you'll have another one-stop shopping alternative to IBM for all your IT needs. Enterprise hardware? Check. Compute, storage, and networking? Check. Soup-to-nuts software--everything from system management to business analytics? Check. Full range of IT services--consulting, managed hosting, and cloud? We've got you covered. End-user devices? Well, uh ... our management software can handle any white-box PCs you end up with, and iPad support is coming soon.

If you're a consumer, scratch HP off your shopping list until the dust settles. Putting aside the confidence-sapping, orphaned-after-one-month TouchPad move, it's clear that HP PCs are now second-class citizens to be either: (a) spun off to a separate company (probably the best scenario for existing customers) or (b) absorbed, Lenovo-like, into a burgeoning Chinese consumer electronics monolith like Huawei or HTC. In either case, don't expect much innovation from HP-branded products for the next couple of years, and support could get dicey during the transition. However, if you're self-supporting (as in, the first thing you do with a new PC is wipe the disk and install Ubuntu) you'll probably be able to pick up some serviceable HP hardware at fire sale prices--witness this weekend's $100 TouchPad clearance.

What does this mean for HP? The disassembly of the Fiorina-built consumer product scaffolding (does anyone still remember Fiorina's "digital home" $300 million consumer products marketing blitz, or her 2005 CES keynote?) is only going to accelerate. Once plans for the PC unit solidify, the next plank to go will be Imaging and Printing. Aside from being a declining business, with revenue down 1%, operating profits off $148 million, and supplies accounting for two-thirds of the business in the latest quarter, it's stuck in a somnolent corner of the tech landscape-- an afterthought in this age of tablets and electronically-consumed content. Printers are another of those consumer products out of step in the new, new HP, so look for Apotheker to rerun his PC divestiture play and either sell or spin off the imaging and printing group.

As HP unloads consumer products, it will need to plug holes in its enterprise software and services portfolio by gobbling smaller developers of point product and services, often in a frantic and extravagant fashion--witness the just-announced $10 billion Autonomy acquisition at a 64% price premium and a staggering 11-times revenue. Execution is the key to success on the M&A front, both in selecting the right targets, then integrating the product pieces and acquired employees into a coherent business.

While Apotheker's strategy to out-IBM Big Blue may be prescient and ultimately successful, I wonder whether HP is jumping from the frying pan to the fire.

Sure, consumer electronics is a brutal, commoditized business, with slim margins and rapid product cycles. But infrastructure, whether it's IT or construction, is notoriously cyclical. Times are good when the macro-economy is booming. But in periods of contraction or stagnation, such as we have now, infrastructure spending is first in line to get cut. This risk can be mitigated by HP's ongoing services business, but cloud could disrupt that success.

Regardless, HP has charted its new course. Now, both IT departments and consumers must adjust their plans accordingly.

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