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August 23, 2011
HP will halt webOS hardware development and production (namely smartphones and tablets) in Q4 2011. webOS' future as a software platform remains uncertain, with HP 'exploring strategic alternatives to optimise the value of the software platform and development capability'. Both webOS hardware and software find their roots in the acquired assets of Palm, bought in April 2010 for $1.2bn.
At the same time, HP confirmed a broader move to divest from the personal computer hardware business (mostly Windows-based notebooks and desktop PCs). HP intends to evaluate a range of options, including spinning off its Personal Services Group unit in charge of the PC business - in HP's fiscal year 2010 the unit accounted for 32 percent of the company's net revenues.
With HP's shift away from the consumer hardware business, it is refocusing on the professional managed information services sector. In August 2011, HP confirmed it will acquire enterprise software company Autonomy for $10.2bn. Autonomy powers a range of services, including search, customer interaction solutions, records management and archiving, business process management, and web content management and optimisation (including rich media).
Ever since webOS was still a Palm project, a series of mistakes seriously handicapped its chances of success, such as weak operator support and long time-to-market.
HP's purchase of Palm was completed under a different leadership, at a time when the market still seemed fertile for competition from new entrants. Unfortunately for HP, its latest webOS line-up failed to convince, and the devices it powers have now fallen under the axe as HP transitions towards enterprise services.
Over the last year HP has been ramping up HP its portfolio of enterprise services. It spent $2.35bn on 3PAR (manufacturer of hardware and software for data centres and storage), acquired ArcSight for $1.5bn (enterprise security software solutions) and most recently Autonomy. Increasingly, this puts it more into the business-to-business services industry with the likes of IBM and Oracle than in a consumer hardware business that is yielding low margins for everyone but Apple. In fiscal 2010, HP's Personal Service Group reported net revenue to earnings ratio of just 5 per cent far lower than the company's other major business units.
Within this enterprise-focused approach, there are many options for HP to monetise what remains of Palm's assets. The webOS platform could be licensed or sold to a hardware player eager to try vertical integration as an alternative to Android or Windows Phone. Such an outcome remains very unlikely as the investment required and the associated risks outweigh short-to-medium term potential gains.
Another option would be to leverage Palm's patent portfolio and convince a major player to transact in an effort to build up legal defence in today's heated context of patent litigation.
By contrast, the PC business is likely to yield HP little in the way of returns in its new enterprise-focused strategy. PCs are a commodity business, with low margins on the vast majority of devices sold. With product differentiation for OEMs that typically use similar components, the same operating system (Windows), and the same handful of manufacturers becoming ever more difficult. Long term, the relatively large number of competitive brands in the market is likely to result in further price erosion and even tighter margins. A far cry from the 10 per cent plus earnings to revenue ratio HP is achieving in enterprise.
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