Las Vegas, Nevada. A place known for conference tourism and gambling lit up for the 35th time to greet the attendees of 2013 International CES conference. In all the commotion of numerous important and less important PRs sending email blasts promising that their product is the best thing since sliced bread, somebody is missing. That "somebody" is not "anybody". That "somebody" is a company that employs more people than Apple, Microsoft, Intel, Nvidia, Qualcomm, and AMD combined. You've guessed it - HP.
In terms of revenue, the seven companies we mentioned above achieved a total 2012 revenue of over $325 billion. HP barely passed the $120 billion mark and had a net loss of $12.65 billion. For a company that competes in the consumer, enterprise, and software service spaces, the net revenue and net income per employee is significantly lower than the industrial average. What went wrong?
The Dream... turning into a nightmare?
Hewlett Packard or HP was a Silicon Valley dream story, and served as inspiration to numerous others that started on the same path, including the companies we mentioned before (AMD, Apple, Intel, and Microsoft). However, over the past decade we have seen HP rushing towards the same cliff Nokia and many others rushed to and ultimately tripped over. The reasons are many, but in our conversations with the industry insiders and former HP employees of all levels, we learned the sad truth - the terms 'HP' and 'Innovation' have nothing in common, and the revenue drain can be traced directly to executive decisions that killed many innovative products. This article will focus on what went wrong in the PC/Consumer division, which brought the majority of net income to the company. Back in the day, as much as 87% of HP's net income was coming from the printer division, which relied on lucrative corporate deals to sell new printers and more importantly, new cartridges and toners. HP enjoyed as much as a 700% margin on a piece of plastic and ink, and made sure it would protect the revenue stream.
The Demise of Innovation
As time went by, the industry shifted to a new model - consumers drive enterprise, a move that caught HP (and a lot of other industry giants) off-guard. The company was focus so much on positioning itself to go head to head against the IBM and Oracle that it forgot it has to have "wow" products in order to move units. With moving boxes comes the services, and then you can justify having over 15,000 employees that write backup software for the company.
In our conversations with the sources that insisted on anonymity due to their previous or current roles, we learned that a lot of things went wrong in the PC division, which makes up the majority of the company's revenue.
Enter the summer of 2011 and the infamous announcement that they would spin off the PC division. One of our sources gave us a following statement:
"The problem wasn't Leo (Apotheker, ex-CEO HP, laid off before Meg Whitman came onboard). Leo was inept as a leader, but he couldn't do anything with all the decisions ran by the board. Autonomy decision came from Ray (Lane, Chairman of the Board), PC (spinoff) decision came from Todd (Bradley, leader of PC division). He wanted the CEO position of a standalone company, and knew he could never get HP."
Even if this construction is not true, we have heard similar behind-the-door discussions, and the general expression of dissatisfaction is simply pouring from the company. From the ill-fated HP-Compaq merger and Michael Capellas and Carly "Curly" Fiorina, we have witnessed a decade-long decay of HP's R&D staff and losing leading positions in practically every branch of the market where HP competes.
One of primary reasons why HP has not been able to capitalize on its otherwise innovative products is a lack of investment (will to invest) to bring the product development full circle, releasing unfinished products. The investments were redirected to other departments such as marketing, while the engineering departments were plagued with layoffs and budget cuts.
Examples where HP lost billions of dollars in revenue (and lost countless millions in acquisition and development) are countless. Recent examples include the HP TouchPad tablet, PalmOS based printers (from the ill-fated acquisition of Palm, Inc.), TouchSmart series of desktops (great idea, poor execution and product design) and even products such as Razer Blade could not get a green light, even though HP could have driven the price down to a manageable number.
If you're wondering what Razer Blade is doing in a story about HP, it is the best example of "Innovation Cancer" that has riddled HP for over a decade now. The Blade design concepts come from a series of designs which were supposed to be the design language of HP. The design comes from the Voodoo PC team which HP acquired in 2006, which raised a lot of attention with the HP Envy 133 notebook, the only notebook which received as much attention (from the Windows PC side of business) as the MacBook Air, which launched at approximately the same time.
The Envy 133 was a great notebook, the world's very first ultrabook and came from collaboration with Intel, a company which often does not get the credit its engineers deserve (if you're using a notebook today, it probably use Chiclet keyboard, which originally appeared on Apple Macbooks. The design was licensed to Apple by Intel). Envy 133 was notoriously difficult to produce, since it was an all-carbon fiber design, but it served as a spark of innovation coming from HP.
Razer Blade came from the same philosophy. HP's industry designers worked with Intel on creation of the new design language, which would have a top model featuring a smartphone panel for a touchscreen and many new innovative features.
The target price for the top model was set at a $1999 price point, and the design would trickle down to a $799 price point. However, in one of the conversations, Todd Bradley shot the project down, even though it was Intel that paid for most of the engineering costs.
The words used were quite profane, and had to do with "I shift more boxes in a day than any of you will in your lifetime." Needless to say, HP lost a fair amount of designers and engineers after the outburst made the rounds in HP's internal email channel.
Instead, designers were shifted on to work on making the Envy designs to look as similar to Apple MacBook Pro as possible, citing Steve Jobs himself: "copying is the sincerest form of flattery."
Through some connections, the senior management of Razer, Inc. got their hands on the design and managed to persuade Intel to give the design to them. Unfortunately, two years have passed since HP sent the design to Razer for manufacturing, which meant that the specs are woefully inadequate. The second generation Razer Blade, on the other hand - is probably one of finest Windows-based laptops.
The sad examples of the Razer Blade and Pocket PC only confirm that "HP is a toxic culture," and the innovation is stifled by internal arguments, as a recent article on Business Insider revealed. After all, you had BoD members deliberately leaking information to the press and the CEO that was wiretapping that said media to find out which board members leaked. Sadly for Patricia Dunn (the CEO just mentioned), it was the vast majority and the board retaliated by quickly disposing of her, and a similar fate happened to her successor, Mark Hurd.
The Demise of Market share
All of the internal wrangling would probably make a good MBA case study, but that did not help HP to bounce back, as the company is under attack from all sides. Their Qualcomm-based Windows 8 tablet got pushed back to 2013, TouchPad was a failure from day one - and all of this comes from a company which beat (and later acquired) Palm Inc. and its Palm OS from the throne with their Pocket PC PDAs. The company unfortunately, saw no point in turning their Pocket PCs into smartphones - another great way of predicting where the market will go… not!
HP saw the end of 2013 with negligible market share in mobile (smartphone / tablet / PDA) market, and lost its position as the world's largest PC manufacturer. In the overall computing share, the world's #1 is Apple (Macbook + iMac + Mac Pro + iPad), while the traditional PC market (Desktop, Laptop, Server, Workstation) saw HP being beaten by Lenovo. Time will tell if Meg Whitman can change the stale and bitter situation in the corporation, but nobody can say she is not doing everything she can to change the toxicity levels. Our sources agree that Meg is good for the company, but that "she [Meg] came two CEOs too late. She can do it but it will take a lot of time."
One thing that is certain is that HP cannot continue the way it is currently being handled. The toxicity we listened to from various sources that are still at HP or at other companies impart a feeling of regret that HP lost its (innovative) way and that the company needs to go back to its core competency: excellence through engineering.
After all, the world consumer market has decided - they want to pay for quality, and they want it in quantity.