How HP’s Surrender Changes the Game in Mobile and Computing

Note: This article also available to read at TechVida, perhaps a new joint project moving forward.

Everyone was shocked in 2005 when Lenovo purchased IBM’s PC division, signaling the withdrawal of the company from the market it helped to create.  A week ago, one of the original IBM PC team members declared the PC to be dead. Dell reiterated earlier this week that they are moving out of the PC market. Today, HP announced that they’re surrendering, too, as they look to spin off their PC business and plan to shutter the WebOS division entirely.  It’s no coincidence that Apple was today named the #1 manufacturer of personal computers, when tablets are included in the mix.

IBM’s exit from the PC market was a shock in its time, but doesn’t hold a candle to today’s announcement by HP. When IBM dealt its PC division to the Chinese, only its Thinkpad line held any strength, and almost exclusively in the business market.  IBM’s PCs had long ceased to be relevant to the home market. HP, on the other hand, has represented the Last Great Hope to many industry watchers looking for anyone at all to emerge with a relevant alternative to Apple’s essentially unanswered coup of the past five years.  Its purchase of Palm was hailed by many, including me, as a chance for HP to plot its own future rather than allow Microsoft to determine its future success or failure.  Now, that hope is extinguished, only two months after the release of the Touchpad, HP’s answer to the iPad and the first major WebOS release by the company since its acquisition of Palm. Touchpad sales were abysmal and reviews were tepid; even after lowering the price by $100, reports emerged that the sell-through rate at Best Buy hovered around 10%, or about 25,000 units, not factoring in returns and exchanges.

The future of WebOS now is clouded.  HP claims that it will work to identify how to most effectively utilize the OS moving forward.  It appears the company will seek to find other hardware manufacturers interested in licensing the OS, which is a mild victory for the mobile world. After all, despite its issues, most industry watchers agree that WebOS exhibits a style and sensibility an order of magnitude beyond most Android offerings. WebOS has had the most potential as a legitimate threat to the iPhone and iPad moving forward. Even so, potential OEM partners must certainly be wary of licensing the OS. If HP wasn’t able to sell its tablets, even with significant buzz and marketing leading up to its release, why would they be able to do any better?  And how can HP exhibit a legitimate intent to actively update the platform when they shut down their own hardware operations only a year after its acquisition?

It’s becoming increasingly obvious that there isn’t a tablet market at all, but simply an iPad market, as Android models similarly continue to founder. Many say that this will change when Google releases its next version of Android, but the same empty speculation has preceded every Android release, and every major Android tablet release, to date.  As for Windows-based tablets, you’re more likely to find a unicorn playing Duke Nukem Forever in your grandmother’s living room than you are to find a Windows tablet that’s sold more than a dozen units in the past year.

While WebOS’s future is clouded, Google’s acquisition of Motorola makes Android’s future no clearer. The search giant spent more than two years’ worth of profits on a company with less than stellar mobile sales, a staff almost as large as its own, disastrous investments in the home media hub space via Google TV and no discernible trajectory leading to future growth. Such a move surely makes other Android manufacturers feel threatened, facing the specter of an in-house Motorola receiving favors and special treatment. Google insists that Motorola will operate independently, however, and that they acquired them explicitly for their patent portfolio, out of fear that patent “aggressors” like Apple, Oracle, Microsoft and others might have a real case against its Android OS. This case became stronger when a consortium of not-Google mobile companies including Apple, Microsoft, Nokia and others purchased the Nortel Networks patent library.

Apple has already been granted injunctions against Samsung, the most egregious Android offender, in the EU and elsewhere.  Oracle’s ongoing suit against Google for improper use of Java in Android is on the verge of exploding onto the scene, as emails from Android head Andy Rubin and others show that Google made the decision to use Java first and deal with the consequences later.  Meanwhile, Microsoft continues to silently suck dry smaller Android device manufacturers as it extracts licensing fees for the patents of theirs that are being violated, as well.  Many believe that Microsoft is making more money on Android right now than Google thanks to such fees.  Google believes that it can use Motorola’s patent library offensively to force Apple and others to the negotiating table for a cross-patent licensing agreement, but such an agreement is far from guaranteed.  If the case were so strong against Apple, for example, why did Motorola not pursue action prior to the acquisition?

Also, to discount the bloodlust felt by Apple– and Steve Jobs in particular– against Android is to misunderstand Apple.  Eric Schmidt served on Apple’s board of directors when the iPhone was in development and the shift in Android’s trajectory from a Blackberry lookalike to an iPhone competitor was unmistakable during his tenure.  Jobs feels personally betrayed, much as he did when he discovered that Bill Gates had appropriated many of the Macintosh’s features for Windows in the 1980s.  That betrayal led to Apple’s downfall, Jobs’s ouster from the company he co-founded and the near bankruptcy of the company.  Expect no mercy and no negotiations from Apple in its war against Android.

Still, none of this truly accounts for the sea change in the PC sector or the implications of HP’s exit from the market. With Dell focusing elsewhere, IBM out of the game and HP looking to rid themselves of what was a core part of their business, the PC market has essentially dwindled down to a handful of specialty gaming manufacturers, Acer, Toshiba, the empty husk of Gateway and a pile of Chinese also-rans. Aside from Apple’s Mac line, the personal computing space has been reduced to an exercise in commodity economics.  PC manufacturers have simply been unable to find compelling differentiation techniques since they all run on Windows and use much of the same hardware.  This has led to a consistent and comfortable stream of profits for Microsoft which have allowed the company to brush aside its many strategic blunders in the past decade.  Hardware makers, however, were left to fight with the only real weapon they had– price– until now. At this point, the margins are so razor-thin on PC sales that the market has simply become unprofitable for companies like Dell and HP.

This leaves Microsoft in a serious quandary. The company doesn’t manufacture its own hardware, so it is deeply impacted by its critical partners starving to death.  To whom will they profitably license Windows 8?  Under Steve Ballmer’s reign in Redmond, the company has become more reliant on Windows and Office as revenue sources, not less. Although Windows Phone 7 is finally a semi-respectable showing in the mobile space, Microsoft’s incompetence there thus far has left it chasing single digit marketshare in the mobile phone market and single unit share in the tablet space.  Microsoft can’t afford to jump ship on the PC market or allow it to dwindle; it’s the company’s very lifeblood and one it is poorly positioned to replace.  

There are no easy answers for Microsoft. Few use Windows by choice today the way one chooses to use Mac OS X or iOS.  Windows users use Windows because their company licensed it or because they always have.  These are not the sort of active sales points a company needs to maintain hold of a market.  Perhaps the boldest strategy for Microsoft would be to purchase HP’s PC business and try to muster a direct rebuttal to Apple’s software/hardware tandem.  But how will Microsoft set apart self-branded PCs strongly enough to compete with its own Chinese licensees?  Will it give them exclusive features or first access to new versions of Windows?  If so, is it possible that licensees could look to ship PCs with a Linux build, small package of net apps or simply no OS in retaliation?  Microsoft seems ill-prepared to answer such questions, but must seriously consider acquiring HP’s PC division if only as a tool to improve the repute of Windows in the marketplace.

Meanwhile, Apple continues to slowly devour the fuel that allows the industry to persist: profits. Apple’s profit-share is at an all-time high in the mobile and computing markets as the company continues to make most unique, highest-quality products on the market.  Apple has long been criticized for being a premium contender, far more expensive than other choices.  Yet that’s no longer the case. Apple’s success and COO Tim Cook’s logistical genius have allowed the company to make supply deals for critical components like flash storage, RAM, displays and more that no one else can match. Apple simply devours the supply for such components at a bulk rate, leaving everyone else to fight over what’s left at a higher price. That’s why no one has been able to match Apple’s price on the iPad or Macbook Air and why the iPhone 4 remains a dominant competitor in a mobile market that shifts daily despite being more than 14 months past its initial release.  Apple makes more money on each product it sells than any of its competitors, and it does so while charging an increasingly competitive price.

While the PC market is continuing to shrink, Apple’s sales and share continue to increase as they offer the only compelling answer to mainstream users trying to judge the effectiveness of the Pentium 4 box they bought five years ago versus a newer model.  For the majority of tasks common users undertake on PCs– word processing, image editing, web browsing, etc– there’s little reason to move past Windows XP.  In the past five years, on the other hand, Apple has progressed from Panther to Tiger to Leopard to Snow Leopard to Lion while continuing to improve upon iLife and iWork.  The Mac today looks drastically different than it did five years ago; the same cannot be said of PCs.

Apple continues to march on as its competitors find new and innovative ways to implode.  With Android scattershot, WebOS on life support and Windows Phone 7 yet to make much of a dent, Apple’s competition in the mobile sphere becomes less credible by the day.  The same is true in the PC space, a fact irrevocably confirmed by HP’s announcements today.  Unless leaders in both fields find a way to leapfrog– not simply match– Apple in terms of spurring consumer demand, the component supply advantage Apple has will grow almost too large to surmount.  HP saw the task before them and decided that surrender was the best course. If even they cannot chart a worthwhile way forward, then who will?