Dear Meg, HP is Still a Goner
A year ago, Meg Whitman decided it was time to venture back into the business world by grabbing onto the HP CEO baton from a badly wounded Leo Apotheker. What for? My best guess is to enter the Pantheon of Great Turnaround CEOs of failing companies, best exemplified by the work of Lou Gerstner with IBM in the early 1990s. It comes too late though, as the $120B company has none of the core legacy that IBM had with mainframes that ultimately allows a company to rise from the ashes. HP along with Dell and the other PC vendors are all locked into a business model whose fate is determined by others. It wasn’t supposed to be this way when the decision was made in the 1990s to cast off Bill and Dave’s legacy for a promise of dominating Computing from Big Iron all the way down to PCs. Many people forget, that HP once designed and built RISC processors in their own leading edge fabs. The surrender of this capability, ironically was not supposed to open them up to their eventual destruction at the hands of system competitors who would build their own (i.e. Apple and Samsung).
Whitman’s warning a week ago that HP would enter the valley of Death for at least another year and then rise again in 2014 or 2015 sent nervous investors scampering for the exits. As a result, HP’s stock is now down 50% in the past six months (Dell is also down 50%). The squeeze in PC profits is most painful in the consumer market, where preferences and pocketbooks seek out sleek smartphones and tablets. A retreat to corporate is in motion but hardly a rampart to the coming onslaught.
A little over a year ago, I wrote in a blog
that the disaster that culminated in the dismissal of then HP CEO Leo Apotheker over his attempt to spinout the PC Group, could be traced all the way back to July 6, 1994 when they signed an agreement with Intel to stop their own RISC development in exchange for a partnership to define the 64 bit Itanium architecture. This set in motion the decisions whereby the highly profitable instrumentation groups (the true legacy of Bill and Dave) were spun off and in their place a full range of proprietary architectures were acquired (Tandem, DEC VAX and Alpha etc). All would be converted to Itanium and customers would have their one stop shop fulfilled by HP. Intel would make it all so seamless by paying Billions to port the Software Industry over to the new architecture all the while telling a story that 32 bit x86 processors were fairly soon going to hit a performance wall. The two were married to the vision of dominance and off they went.
Software, however, would not be so easily led to the new architecture and in the late 1990s the never-ending trend of computers always desiring to be smaller and more mobile would extend x86 as Itanium wallowed in overextended developments. WiFi entered the picture in the early 2000s and thus drive mobile volumes past desktops. AMD saw an opening in the server space and pressed ahead with 64 bit x86 processors and within a year Intel was forced to concede with its own 64 bit x86 chips. Itanium was defacto dead for all the world to see. Itanium De jure meant that the parking meters would still be left running as the big Iron computers would require constant R&D maintenance $$$ from both Intel and HP. At the end of the day, one has to wonder what the bill would have been had HP stayed with their RISC development for workstations.
Steve Jobs has been called a Genius Control Freak for good reasons. It must have occurred to him sometime after the Portal Player driven iPOD was released that to truly own the marketplace without competitors chomping at his heals he had to do the opposite of what HP did and get into the processor business. Let's not gloss over this because building a mobile processor on a near leading edge process has resulting in many $100M+ sinkholes in Silicon Valley (I speak from experience) . However, freedom from Intel’s $200 mobile processors, adds up quickly. The new A6 processor has been described in glowing terms due to its outstanding performance and low power capabilities. I think it is somewhat of overkill for the iPhone 5 but it most likely is targeting a broad set of new devices in the coming year. The greater point of Apple's effort and that of Samsung is that it has proven that going vertical in the computer industry was the only path to success; something HP abandoned in 1994 and which in the end will make Meg Whitman’s turnaround effort an exercise in futility.
FULL DISCLOSURE: I am Long AAPL, INTC, ALTR, QCOM