Death of the PC not the death of HP, Dell
To survive means finding ways to increase high-margin segments.
It has been a couple of weeks since software giant Microsoft (MSFT) told its OEM partners Hewlett-Packard (HPQ) and Dell (DELL) they now have to start carrying their own weight. (Microsoft owns and publishes TechBiz, an MSN Money site.)
In revealing its plans for the Surface tablet bearing its own name, Microsoft has essentially proclaimed its hardware independence. The implication is that it wants to stomach the responsibility for its own successes and failures -- the same model that has helped Apple (AAPL) become the largest company in the world while sending Research in Motion (RIMM) in a death spiral towards irrelevance.
In fact, the so-called "unified platform" has been so successful for Apple it has Google (GOOG) now working hard to emulate it by essentially becoming a rival to its own partners in Amazon (AMZN) and Samsung with its own tablet in the Nexus 7.
It appears things have turned upside-down as the technology sector is abandoning an old working concept, one that was akin to the separation of the branches of government.
For years it's been understood that original equipment manufacturer, or OEM, partnerships was the effective model -- splitting the makers of hardware from those that specialize in software. The question is, where does this new change leave the hardware vendors now apparently under attack by their own software partners? If software companies are now entering hardware, what is left for them?
Before we answer this question -- one that can venture into a number of directions -- we need to make a few safe assumptions while also seeking to understand it is very possible the changes we are witnessing can very well signal the beginning of the end of the PC era.
What we will be left with is a new age of computing lead by the three-headed monsters of Apple, Microsoft and Google, an era (similar to the rise of the PC) that will feature a rash of consolidation just as when HP acquired Compaq and lesser-known brands such as AST and Digital Equipment went defunct.
But it seems this new shift in model has been anticipated -- neither Hewlett-Packard nor Dell appear surprised. Their responses have been something like, "Since our software partners are entering hardware, we need to respond back by entering software."
In fact, Dell has been on a shopping spree of late by having spent $2.4 billion dollars to scoop up Quest Software (QSFT). This comes on the heels of its recent acquisition of SonicWall for an estimated $1.2 billion.
Essentially, these transactions, which also included buying Wyse Technology in April (this year), Perot Systems (in 2009), KACE Networks (in 2010) and in particular its recent deal for Quest, suggest that for some time Dell has seen and read the writings on the wall that says "Adapt or die." Clearly, it's trying to avoid the latter. But will it be enough?
Meanwhile, Hewlett-Packard has been making its own preparations for the future -- except in the process it has also been hampered by playing musical chairs in the CEO's office. Luckily, it appears to have found a new leader in Meg Whitman who so far appears to have placed the company on a path towards a solid recovery.
As with Dell, HP has been on a shopping spree of its own in anticipation of this new trend. Among its recent software acquisitions include 3PAR, Arcsight (in 2010) and most recently scooping up Autonomy Software for a little over $10 billion in cash.
In addition to these moves it has recently put plans in place to consolidate its PC and printing divisions while have also announced a reduction in its workforce - moves that the company anticipate will help it save $3.5 billion in expenses over the next couple of years.
For HP and Dell to emerge successful as the software companies enter their space, their challenge will be to discover ways to expand their high-margin segments such as services, networking, storage as well as figure out ways to leverage their recent software acquisitions to synergize not only with their existing businesses but also to address the new enterprise phenomenon that is known as "the cloud."
This will be no easy task as Apple, Microsoft and Google are not just going to roll over and play dead.
Nonetheless, what Dell and H-P have done is respond to the threats while placing themselves on a path towards restoring lost credibility and returning value to shareholders. While it is still too early to proclaim their resurgence, Wall Street should give them their due credit and investors should give them some time.
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It's not likely I would buy software from HP or Dell unless I had to. We all have already the experience of the "built-in" software these guys have stuck on our computers, and generally we don't like it much.
However, I might very well buy a Microsoft-branded computer. The X-Box proves that MS can create and sell a very functional piece of hardware.
But they're only talking about tablets here. Tablets have a place but real data processing (beyond capturing time and expense data) will not be done on tablets any time soon.
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