The technology company HP will soon become two technology companies. CEO Meg Whitman announced on Monday that the company will be separating its printer and PC businesses from the rest of the company. Here's why they're doing it.
Why is HP splitting into two companies?
Most people know HP as a leading manufacturer of printers as well as desktop and laptop computers. But HP also plays a big role in the less visible but more lucrative corporate IT market. HP CEO Meg Whitman believes that these are dramatically different businesses, and that each of them will become more successful if they're not tied together.
In recent years, companies other than Apple have found it harder and harder to succeed in the PC business. Two factors are squeezing HP's PC division. First, the rise of tablets has limited demand for PCs in general. Second, low-cost PC makers in Asia are putting downward pressure on PC prices.
Things aren't quite as grim for HP's printer business, but it's facing the same basic problems. As people increasingly read things on tablets, they're doing less printing. And the market is getting increasingly competitive.
So Whitman's idea is to cut those struggling businesses loose so they can make the hard choices needed to stay profitable. Meanwhile, she's going to focus on HP's enterprise hardware and software businesses, which have better profit margins and more room for growth.
How big will the resulting companies be?
The new PC and printers company will be called HP Inc. The corporate IT company will be called Hewlett Packard Enterprise. And according to a company presentation, they'll be almost identical in size:
It's worth noting that after the split, HP Inc. and Hewlett Packard Enterprise will each be among the largest companies in the technology sector.
Is there a precedent for the breakup?
Whitman is following a playbook developed by IBM a decade ago. Like HP today, IBM at the turn of the century offered extensive product lines for both consumers and businesses. IBM was a leading manufacturer of PCs and also built hard drives and printers.
But IBM decided that its enterprise IT business — selling hardware, software, and services to medium and large businesses — would be more lucrative than selling PCs and related products to consumers. So IBM sold its hard drive business to Hitachi in 2002, its PC business to Lenovo in 2005, and its printer business to Ricoh in 2007.
The PC transaction seems to have worked well for both sides. Since 2005, Lenovo has grown to become the world's largest PC company, eclipsing HP in worldwide sales last year. Indeed, the IBM-Lenovo transaction seems to have worked so well that this year IBM sold part of its server business to Lenovo this year.
IBM used to think of itself as being in the business of selling computers. But IBM realized that it's more profitable to sell something more intangible: the service of helping large organizations navigate the complexity of modern IT problems. IBM signs long-term support contracts with corporate customers, where they agree to supply a variety of hardware, software, and support services. But rather than making all of the hardware themselves, they treat it as a commodity they increasingly buy from other vendors and re-sell to their customers.
What's appealing about this enterprise IT market?
For companies like IBM and HP, the corporate consulting market has two big advantages over making physical products: it's less subject to foreign competition and less vulnerable to disruptive innovation.
When you buy a PC or a printer, you don't care who made it or where they were located. Indeed, regardless of the name on the label, most PCs on the market were manufactured in Asia anyway. This makes it hard for an American company with high US labor costs to compete effectively.
In contrast, it's much harder for Chinese companies to compete in the corporate IT market. Big American companies want IT consulting services provided by people who can travel to the United States, speak fluent English, and have a high level of education. Only Western companies can seriously compete in this market, which helps keep profit margins up.
Companies that sell IT services are also more insulated from waves of disruptive innovation that regularly destroy companies in the consumer hardware business. For example, in the last five years, BlackBerry has gone from a leading smartphone vendor to an also-ran. But companies like IBM and HP can afford to be hardware-agnostic: if their own technology doesn't fit a particular client's needs, they can buy hardware from someone else and pass the cost along.
What are the downsides to HP's strategy?
One big disadvantage is that HP will have less leverage in negotiations with suppliers. Right now, HP manufactures both PCs for consumers and servers for corporate customers, and these product lines share many components. By buying in bulk, HP can get better deals from vendors such as Intel (which makes computer chips) and Seagate (which makes hard drives).
Now the two companies will have to bargain separately, giving them less leverage and perhaps leading to higher prices. On the other hand, the new companies will still be some of the largest in the industry, so this may not be a huge problem.
What does this mean for consumers?
The parts of HP consumers deal with — the PC and printer businesses — are all staying together, so consumers shouldn't see much change in the short run. You'll still be able to get an HP PC and an HP printer at Best Buy (at least until Best Buy goes bankrupt).
If all goes according to plan, consumers could eventually see benefits — in the form of more innovation or lower prices — as the new, nimbler HP is able to focus on improving its consumer products. But even if the strategy works, the changes are likely to be too gradual for most consumers to notice.