Watch CBSN Live

HP to Shuck PCs, Emphasize Software -- Just Like IBM, Only Way Too Late

Just hours before its quarterly earnings release, here comes a report that Hewlett-Packard (HPQ) will spin off its PC business and that it is in talks to buy software vendor Autonomy (AU) for $10 billion. Autonomy even confirmed the rumors. Any bets that HP will have a few things to say on the topic later today -- including, most likely, news of a continued decline in PC sales?

It's a surprise, but shouldn't be. The PC industry is in clear decline. HP wants to get out before things get worse, just like IBM did. Only HP is doing this very late in the game and will be hard-pressed to pull off the same type of transformation.

PCs fall down, go boom
According to IDC, the first quarter of 2011 saw a 3.2 percent year-over-year decline in global PC shipments. In the second quarter, both IDC and Gartner saw global unit shipments that had grown by 2.6 percent and 2.3 percent respectively. But U.S. shipments were down by either 4.2 percent or 5.6 percent, depending on whom you asked.

It's a shaky business, what with consumers still feeling a big economic crunch and many finding that smartphones or tablets do much of what they need. Given the industry's thin margins, the only way to make money is to sell lots of volume -- and getting an adequate return on consumer PCs is becoming more difficult for HP.

In the second quarter, personal systems group revenues (PCs, that is) were down 5 percent year-over-year and 10 percent from the first quarter. The consumer portion was particularly dismal: down 3 percent year-over-year and 14 percent from the first quarter.

Out of the frying pan...
HP CEO Léo Apotheker has said that he wants to move HP more into consulting and software and away from commodity hardware. It's a solid strategic move right out of the IBM playbook. Unfortunately for HP, IBM dropped its PC line six years ago after it had already shifted heavily into services.

Not that HP is a lightweight in services. In the second quarter, they represented $9 billion in revenue. But the personal systems business was $9.4 billion. That's going to be a big shortfall to make up, and given that Autonomy grossed $256 million in the second quarter of 2011, it won't be able to do it alone. Looks like HP is about to become a smaller company.

Not that you can blame Apotheker. The problem HP faces comes from years of mismanagement, particularly from Mark Hurd and the company's board, which together killed employee morale, devastated innovation, and undermined the company's future through unwise cost cutting while sparing the comfort of top executives.

But it doesn't matter. Apotheker took on the job and now he has to try pulling the company out of a long decline. That's going to be a lot tougher than making some hard decisions. It means that he and the company have to deliver on a daunting set of goals.


View CBS News In