Hewlett-Packard's personal-computer business should be dead by now, if you had believed what many industry analysts were saying a few years...
SAN JOSE, Calif. — Hewlett-Packard’s personal-computer business should be dead by now, if you had believed what many industry analysts were saying a few years ago, crushed beneath the juggernaut of rival Dell.
But something strange happened on the way to the funeral: Dell stumbled, and HP has improbably moved back on track.
Palo Alto-based HP got to congratulate itself recently during Mark Hurd’s first face-to-face meeting with Wall Street analysts since he became chief executive April 1.
“It’s very clear that we’ve made the shift” from straggling also-ran, said Todd Bradley, head of HP’s Personal Systems Group, which is responsible for PCs and handheld-digital devices.
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“We’ve taken control of the levers that drive our business,” Bradley added, when his turn came in the middle of a numbing four hours of financial presentations from HP executives in New York.
HP exceeded Wall Street expectations in its most recent quarter, ended Oct. 31. One bright spot was a 9 percent jump in PC sales, with operating profit margins more than doubling to 2.8 percent from 1.2 percent a year earlier.
Back in 2001 and 2002, as then-CEO Carly Fiorina was pushing through an unpopular acquisition of Compaq, the deal looked like an alliance of losers without a credible plan for reversing a tide of red ink in the PC business.
Criticism centered on concerns HP was getting deeper into distributing PCs through stores and corporate resellers at a time when Dell’s direct-to-the-customer model was rapidly gaining market share.
HP and Compaq had a combined operating loss of $728 million from PC operations in 2001. That’s swung to an operating profit of $657 million in the 2005 fiscal year, which ended Oct. 31.
Dell’s growth, meanwhile, has slowed to the point where it only matches the PC industry average, while HP is growing slightly faster than the industry average. And Dell missed its most recent quarterly sales and profit targets.
If the trend continues, HP could eventually win back the crown of global PC market-share leader, a title it lost shortly after the HP-Compaq merger was finished in 2002.
IDC, the research company, says Dell now has 18 percent of the world market, with HP at 16 percent.
It’s certainly possible HP’s small gain in momentum is yet another example of perception outracing reality. Dell is profitable, with room to grow, and has bounced back from previous soft spots.
But Wall Street has already decided to run with the Hurd.
HP turned around its foundering PC business by learning, painfully and slowly, how to do several things at once.
HP now actively sells competitively priced PCs directly through its own Web site, without alienating retailers and resellers. Dell only sells direct, which makes life simpler, but it lacks retail and reseller partners to help move more inventory.
Retailers are giving HP a big boost by subsidizing PC prices as a way to build customer traffic with the aim of selling profitable accessories and extended warranties. Dell, meanwhile, has lost its reputation for industry-leading quality and customer service, apparently because of relentless pressure to reduce costs.
PC World, in its annual survey on customer service in the January 2006 issue, says, “Dell’s halo is fading. Once known for its excellent reliability and service, Dell received scores for desktops and notebooks that were average overall and below average in some areas.”
Average isn’t good enough for Dell, at least not good enough to sustain a stock price based on promises of world-beating performance.
HP, in contrast, is now reaping the benefits of diminished expectations. Just standing its ground against Dell is looking more and more like a victory.
Mike Langberg is a columnist with the San Jose Mercury News.