It’s better-mousetrap time
HP and Dell are on their way to being the next Digital Equipment and Data General.
Those were two mighty and proud companies, the first being the company that toppled IBM (IBM) with its speedy yet less expensive mid-range computers. The second? The Soul of a New Machine, just the most reliable boxes, so good that Michael Bloomberg selected them as the platform for the first Bloomberg terminals. Talk about an endorsement.
Both companies developed proprietary technology that put them head and shoulders above the competition and their stocks were fabulous gainers, the belles of tech, the ones you reached for first on any good tech news.
And then they were gone. Just like that. Defeated by more powerful yet cheaper desktops with commodity, not proprietary, technology. The model evolved and made things obsolete. Better mousetrap. The three companies that ran hardest with it? IBM, Hewlett-Packard and upstart Dell.
Eventually, IBM realized that it had no real value added. It was all a commodity anyway. It sold its PC business to Lenovo for $1.75 billion. People were thrilled that they did and IBM's been getting a higher multiple ever since that sale eight years ago. IBM went into outsourcing and software and in the last few years has been a total homerun.
But Dell and Hewlett-Packard? They stayed with personal computers. HPQ had a superior printing business and it also bought a consultant, but it made its bread and butter in the corporate PC market and then spread out through the enterprise. Remember, HPQ specifically went the other way from IBM and doubled down on personal computers a decade ago when it merged with Compaq.
Dell was the cheapest and the best run. It took the commodity parts, assembled them cheaper than everyone else and became the dominant consumer brand and ultimately the chief rival to HPQ in the enterprise.
Unlike Digital Equipment and Data General, both branched out toward higher-value-added products (although you could argue that DGN did develop the first truly sophisticated inexpensive storage unit using bundled hard drives).Hewlett-Packard bought EDS, the consulting company, four years ago to compete with IBM and Accenture. Dell made acquisition after acquisition to provide more value on big contract wins.
But neither was able to break away from the core businesses and HPQ, in the end, made the disastrous decision to overpay for Autonomy, shelling out more than $10 billion for this global enterprise software company.
We had a real horserace between these two for a bit about who was the PC champion, but suddenly Apple (AAPL) came in with game-changing technology, both the iPhone and then, devastatingly, the iPad and poof, there went the hold on business and consumer that these two giants had. They now seem like two Goliaths to Apple's David, not unlike what Digital Equipment and Data General became when Intel and Microsoft delivered their one-two punch in the late 1980s. This time proprietary trumped commodity because proprietary was simply a better universe.
Now people are going to say don't worry, there's good value here. They are going to point to balance sheets as evidence. But right until the end, Data General had a fabulous balance sheet and DEC's wasn't anything to laugh at. But they had lost the technology battle to a better mousetrap.
It's happened again. With these two disastrous quarters Hewlett-Packard and Dell are well on their way to being the next Digital Equipment and Data General. Sad, but true, and without some real miracles the end will be similarly painful. At least Data General got a lowball bid from EMC in 1999. Digital Equipment? It just disappeared, with the remains sold to, alas, Compaq and they rest in peace at none other than Hewlett-Packard.
Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long AAPL.
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