The Impact of HP’s New Direction—An SMB Market Perspective

–by Sanjeev Aggarwal and Laurie McCabe, SMB Group

After HP’s announcement that it would ditch it’s new Touchpad and put WebOS in mothballs, rumors leaked about it’s intentions to spin-off or sell it’s Personal Systems Group (PSG) PC business and acquire information management software vendor Autonomy for $10.2B. Combined, these moves confirm HP’s CEO, Leo Apotheker’s strategy to get out of the low-margin device business and create a bigger footprint in the higher margin software and services arena.

On the surface, perhaps, not a bad plan. After all, margins in the PC business will only continue to shrink, HP has a (very expensive) white elephant on its hands with WebOS, and Apotheker is of course a software wonk. Furthermore, IBM made what turned out to be a great decision when it sold its PC business to Lenovo back in 2004— and it seems like HP has been an IBM-wannabe for at least the last 20 years, so why not follow suit?

But, there are some very significant reasons that the outcomes resulting from HP’s decision are likely to be very different from IBM’s— many of which revolve around the SMB market.

Being in the Right Place at the Right Time, with the Right Strategy

Unlike IBM, HP has had a significant presence in the SMB and consumer segments. Although PSG accounts for less than 15% of profits, it comprises about one-third of HP’s revenues. In contrast, IBM has always been an enterprise-focused company, with no intentions to make a big play in the consumer market. IBM had been selling off PC-related assets, and had already tipped revenue and profit scales in favor of services and software before it sold its PC division as part of a long-term strategy to exit commodity markets. The Lenovo deal also provided IBM with a partnership opportunity to make huge inroads into selling higher-value products—software, servers and services—into the burgeoning Chinese market.

There’s also the matter of being in the right place at the right time. This is 2011, not 2004. The consumerization of IT is well underway. Employees (whether in small, medium or large businesses) are increasingly choosing to spend their own money to BYOD (bring your own device) instead of using a company-issued brick. And more companies are giving employees an allowance to purchase their device of choice.  This trend will only accelerate as younger employees—who expect cool gadgets—graduate and enter the workforce.

What’s HP’s SMB Entry Point Now?

To be truly successful in the SMB technology market—especially at the low-end—vendors need both a compelling entrée and solutions that can help these businesses grow. You can do it with a must-have business solution—ala Intuit—or with a solid line-up of IT infrastructure products and services. But, on the infrastructure side, PCs and notebooks have historically been one of the first IT products that small businesses buy. This is changing with the rise of smartphones and tablets, but these too are client devices. And SMBs will continue to buy PC and notebooks for the foreseeable future.

Which begs the question, what entry point HP will have into small business without PSG? HP lacks compelling small business solutions and has scrapped its plans for mobile devices. Printers—which HP will presumably hold onto—are even more of a commodity solution at the low-end of SMB than PCs.

HP’s Weak SMB Prognosis

Our prognosis is that without PSG, HP’s value proposition will be much weaker in SMB with this exit. PSG not only provided an entrée to upsell servers and services, but has been, for all intents and purposes, HP’s major marketing arm and “voice” to these businesses.

Meanwhile, since SMBs lack IT resources, they typically don’t want or can’t deal with multiple vendors supplying different pieces of the puzzle. This means that when HP hands off its PC business, both SMBs and the HP VARs that serve them—many of whom are small businesses themselves—will have the opportunity to rethink whether they want to stick with HP on the server side.

Who Gains

PC makers such as Lenovo, Acer, SONY and Toshiba should get a good bump, but Apple and Dell are the big SMB winners.

  • Apple basically owns the tablet space until someone comes up with a way to beat them at their own game (which obviously is tough to do!). But its not just iPads. IDC reports that Apple sold 1.66 million Macs and reached an 8.5 percent share of the market, up from 7 percent in Q1 2010. While a lot of these sales are a result of the BYOD to work movement, more SMBs are also buying them because of their reputation for reliability and security. With HP’s imminent departure,  Apple which has the cool factor and typically affords  higher profit margins than PCs–may be very appealing to some VARs.
  • Dell is now clearly poised to be the #1 SMB infrastructure brand. Since Michael Dell came back in 2008, Dell has surged in the SMB market. Not only will Dell take advantage of market uncertainty, but it is well-positioned in its ability to serve the end-to-end IT needs of SMBs, from PCs to servers to managed services. In the last two years, Dell has made a significant investment in listening to and understanding the needs of SMB customers, and it’s paying off. At the Dell Take Your Own Path event we attended in December 2010, SMB business owners told us that they selected Dell precisely because it could provide the broad range of infrastructure solutions and services that have enabled them to out-perform their peers. Dell continues to extend its SMB strategy and portfolio, with acquisitions and solutions such as it’s KACE infrastructure management appliance; Boomi, for application integration; and storage solutions, such as EquaLogic.  This gives it a solid foundation for extending its SMB footprint beyond PCs and servers.

While it hasn’t fared as well in the mobile device area to date, Dell is building a range mobile devices–laptops, tablets and smartphones–layered with a consistent user-interface called Stage. Over time, and allowing for mid-course corrections, this strategy has more potential to pay off for Dell with HP out of the picture. And, just as Apple will appeal to some disgruntled HP VARs, Dell will appeal to others, particularly those that want to pitch a complete solution from a single vendor rather than piecing together a patchwork of components from several vendors—not only because it’s easier, but because they’ll get better margins by concentrating their business with one supplier.

HP’s departure also opens the door wider for some less likely suspects. For instance, a vendor that already has an ongoing relationship with a large swath of SMB customers, a focus on mobility and the cloud, and willing  to place a strategic bet on the huge SMB technology opportunity. Perhaps a telco, such as Verizon? Finally, the ambitions of Amazon and Google, and their potential to disrupt the SMB market with whatever they have up their sleeves can’t be discounted.

Summing Up

HP’s move to increase its focus on high-margin software and services solutions will definitely impact its ability to maintain a strong position in the SMB market. Unfortunately for HP, it is also likely to find itself outflanked by IBM and hunted down by Oracle in the large enterprise space. Ironically, after growing to be the largest technology vendor in the world by acquiring vendors from Compaq to 3Par to Palm, and now Autonomy, HP appears to be headed back where it started from when it made the Compaq acquisition in 2001: in an uncomfortable middle ground with formidable competitors ready to pounce on all sides.

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