Big Changes at HP

Tablets Are Here for Good, Just Not at HP, Company's CEO Says

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HP believes that tablets have a promising future--but company officials said Thursday that the reaction to HP's first tablet, the TouchPad, was so negative that it didn't make sense for the company to continue in that market. In the company's hotly anticipated earnings call, HP's CEO took pains to keep his options open regarding the company's PC division, which could be spun off or sold.

HP TouchPad
"The tablet effect is real," said HP CEO Leo Apotheker, "and our TouchPad has not been gaining enough traction in the marketplace." And thus ends HP's decidedly short-lived venture into the tablet market.

HP is calling it a transformation: At Thursday's earnings call, shareholders learned of the company's plans to shift gears, potentially dropping its role as the world's largest PC manufacturer in favor of focusing on the more lucrative sides of the multifaceted organization.

The news about HP's WebOS platform--in addition to ditching the TouchPad, the company is also discontinuing WebOS phones--is not altogether surprising. Consumers have spoken, and in light of the TouchPad's less than stellar market performance, HP's decision to scuttle production of its ill-received tablet a mere six months after the TouchPad was first announced is likely in the company's best interest, financially.

But the announcement that the company is also considering a "full or partial separation of the Personal Systems Group" still comes as something of a shock. (The PSG is the division of HP that produces desktops and laptops.) Truth be told, the writing has been on the wall for some time. Consumer interest in traditional PCs has waned, owing in no small part to Apple's iOS juggernaut. HP's desktop and notebook revenue dropped 4 percent since last year's third-quarter report, and while the PSG division remains profitable, falling revenue and shrinking margins--coupled with the failure of HP's attempt to break into the tablet arms race--have likely soured the company on sinking any more resources into a division whose end is likely nigh.

Before HP made its stunning announcement, new sales figures showed that HP had slipped behind Apple in sales of laptops and tablets. During the quarter, Apple shipped 13.6 million units, 10 million of them iPads. That meant that Apple sold more iPads than HP did laptops (the company shipped 9.7 million notebooks in the period).

Over the course of the call, Apotheker repeatedly made clear that HP is merely examining its options with PCs. "I want to make sure people understand ... that PSG is part of HP, and will be managed in a very normal way." Or, more succinctly: " We will refrain on commenting until the board has made a decision." While the powers that be mull over the viability of spinning the PC business into its own company--or selling it outright--it'll be business as usual, which means you probably shouldn't start trying to hawk your new TouchSmart 610 as a rare collector's item just yet.

TouchPad fans, though, are out of luck. "About a year ago, we made a bet on WebOS," said CFO Catherine Lesjak. It didn't pay off. "Strong reviews were met with poor sell through," and investing the time and resources to make the platform strong simply presented too much risk, with no clear sign of returns. So HP has opted instead to eliminate the hardware entirely. That said, HP hasn't quite sounded the death knell for WebOS--the company is "exploring strategic alternatives to optimize the value of the software platform."

"Decisive steps are never easy, and change doesn't happen overnight," Apotheker remarked at the close of the call. An HP without PCs would be a tough pill to swallow, to say nothing of the sudden disappearance of the promising WebOS. Whatever the company's decision regarding the PC business, it has become clear that even household names aren't immune to the winds of change.

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