Another stumble in HP's recovery

S&P Dow Jones Indices LLC announced Tuesday that HP would be among three stocks dropped from the Dow Jones index. As the WSJ reported in today’s paper:

Alcoa, a Dow component for 54 years, will be replaced by athletic-gear maker Nike Inc. Payments company Visa Inc. will replace H-P, which joined the index in 1997, and securities firm Goldman Sachs Group Inc. GS will supplant Bank of America, which spent five years in the blue-chip benchmark.

The changes take effect Sept. 20.

That a metals company would be dropped on its 125th birthday is not all that surprising. It is similarly unsurprising that a highflying New York investment bank would replace the Charlotte-based NationsBank (dba BofA), which is still struggling with its decision to buy Merrill Lynch and Countrywide near the peak of the financial crisis. (As a BofA shareholder, my attempt to bottomfish BofA in the fall of 2008 is still looking pretty stupid; if they hadn’t grabbed these two boat anchors, it might have turned out better — but then how could I know that the government would order BofA’s CEO to destroy shareholder value.)

But banks come and banks go. Hewlett-Packard is a Silicon Valley icon, by some measures the founder of the cluster — certainly the first significant Stanford spinoff and the role model for Apple, among others. The end of its 16 year run in the Dow is another sign that it’s just another struggling commodity company in a mature industry. As Bloomberg reported:

HP Exit From Dow Jones Industrial Signals Revival Challenge

Hewlett-Packard Co. (HPQ) is being removed from the Dow Jones Industrial Average, a sign of waning confidence in the company’s turnaround efforts amid an historic slump in the personal-computer industry.

The exit, announced today as part of the biggest reshuffling of the index since April 2004, delivers another blow to Chief Executive Officer Meg Whitman’s quest to revive growth at the storied PC maker.

Blogger Arik Hesseldahl notes the irony of the timing, since HP shares are up 57% this year. He won the standard non-response:

HP remains confident that we are making progress in our turnaround. We have delivered financial performance in line with or better than our expectations throughout this fiscal year, and remain focused on delivering shareholder value. We are already seeing significant improvement in our operations, we are successfully rebuilding our balance sheet, our cost structure is more closely aligned with our revenue and we have reignited innovation at HP.

Unlike leaving the S&P 500, the move has little practical impact on the shares since there are few index products built around the DJ.

Part of the problem for the three companies is that in formulating his first index in 1896, Charles Dow merely added the stock prices together (rather than using a market-cap weighting as in later indices). As the NYT notes

the Dow is calculated as a price-weighted index, so the stocks with the highest share price have the greatest weight. The three stocks that are being removed are priced in the single- or low double-digit range, putting them on the lower end of stocks in the index.

“They’ve dropped the smaller weights out of the index and replaced them with what they deem to be better candidates representing the way the economy is moving,” said Trista Rose, the global head of index strategy at UBS. “I wouldn’t say that it would have a noticeable impact on trading volume.”

For the same reason that HP at $22 is leaving the index, the world’s most valuable company won’t be joining the index. As WSJ blogger Steven Russolillo writes:

Last year John Prestbo, executive director for Dow Jones Indexes, told Barron’s that including Apple in the index would be “a methodological mess” and that Apple “certainly qualifies in every respect except one, price.”

Russolillo notes that the same argument for Apple (at $500) applies to Google (near $900).

Silicon Valley is represented by Cisco and Intel in the Dow, which also includes IBM and Microsoft and America’s two biggest telephone companies, AT&T and Verizon.

Creative destruction creates carcasses

Veteran tech journalist Therese Poletti this morning looks at the tough choices facing the new(ish) CEOs of three established tech companies. The double-deck headline in Marketwatch says it all:

April 3, 2012, 12:01 a.m. EDT
Can new CEOs fix H-P, RIM and Yahoo?
Commentary: H-P has best hopes, future grimmer for RIM and Yahoo

She begins the story by quoting Clay Christensen from his talk last week at Xerox PARC — a nice touch and obviously a point of view I wholeheartedly endorse.

But then she gets to the money quote:

Once companies have lost their edge, can they ever climb back? In the case of H-P, RIM and Yahoo, the outlook appears to be the best for H-P, worse for RIM, and Yahoo could eventually just be sold, or cut up into bits.

“They have moved to the carcass phase of the business,” said Stephen Diamond, an associate professor of law at Santa Clara University. “That is a very bad sign. That is very interesting for lawyers and vulture funds. But to expect those companies to turn around technologically is all but impossible. H-P may have narrowly averted that,” he said, adding that he believes the tech giant needs to eventually find a more visionary CEO with more tech or engineering creds, or it too will lose its way.

Carcasses? Ouch!

The pessimism on Yahoo seems conventional wisdom. Yahoo was listed among “four dying companies” over three years ago, and the other three have essentially been carved up: Palm bought and essentially killed by HP, Sun swallowed up by Oracle for its patent portfolio, and AMD making a bold (i.e. risky) shift to a fabless/outsourcing model.

Meanwhile, the travails of RIM and HP have been well chronicled. All three companies are at a point — as Apple was in the mid-1990s — where their troubles are so great that they have trouble attracting a top tier CEO. In offering the most optimistic view of HP, Poletti sees CEO Meg Whitman as a savvy corporate politician and transitional figure, who sets the ship aright but then turns to the reins over to a technologist (possibly inside) leader.

This plays to a conjecture I’ve been trying to nail down for my book on engineering entrepreneurship: great technology companies have to be led by great technologists. (Steve Jobs might be an exception to this rule, but he was an exception to nearly every rule).

Still, these are companies that have hit a difficult time, having lost (or in the process of losing) their once certain moneymaking franchise to commoditization and other market turmoil created by creative destruction. As Prof. Christensen notes, this is the inevitable way of the technology-enabled world.

HP matters, Leo didn't

In the latest example of its incompetence, HP’s board of directors fired CEO Léo Apotheker, the same man it inexplicably hired less than a year ago after it fired its most financially successful CEO in a generation.

Into his place comes HP board member (and former eBay CEO) Meg Whitman, who told All Things Digital:

I took this job, because HP really matters to Silicon Valley, to California, to this country and to the world. …This is an icon and the place where the initial spark to create Silicon Valley came from and I am resolved to restore it to its rightful place.

At one level I agree with and admire Whitman. My work as an HP subcontractor in the 1980s and 1990s paid for my house, and I have nothing but respect for the company’s historic role in creating Silicon Valley. Twenty years ago, HP was the best in several segments that mattered. However, the company has largely faded to irrelevance in the past decade: first in some declining businesses, and second, third or worse in growth businesses.

On the other hand, Whitman (seconded by chairman Ray Lane) is promoting the spin that Apotheker was axed because he was a bad communicator. He certainly was awful — more suited for a top-down command and control German bureaucracy (NB: SAP) than an innovative Silicon Valley pioneer. But there was nothing in the latest news to suggest that Whitman is going to repudiate the series of bad decisions promulgated by Apotheker.

In particular, the HP of Apotheker was exactly the opposite of that of Mark Hurd — which was completely consistent with the (controversial) vision of his predecessor Carly Fiorina. A $125 billion company with 300,000 employees can’t turn on a dime — or even as quickly as an aircraft carrier.

As the seventh CEO since 1999, I could easily see Whitman lurching HP into yet another direction with yet another strategy and yet another reorg and yet another grand acquisition and divestiture strategy. This is — and I have to say it — the woman who inexplicability spent $2.5b to buy Skype to complement her online flea market.

Thanks to generous union spending — and daunting party registration figures — Whitman (like Fiorina) failed in her effort to become an elected California official last fall. However, while her skill set is better suited to being appointed HP CEO than being elected governor, I’m not sure the former job is any easier. (I say this as California continues to imitate Greece-style deficit spending without the public employee cutbacks that the latter has reluctantly embraced.)

So running HP is not (as the AllthingsD interview suggests) about better communication skills, or meeting with executing on Apotheker’s inexplicable (and apparently irreversible) $10b acquisition of Autonomy, an obscure UK software company. Nor is it about building upon the unmatched legacy and once vaunted brand name.

It’s about deciding what HP’s unique competencies are, and how they are relevant to today’s highly commoditized, slow growth IT market. Even badly run, the State of California is guaranteed to exist for another 150 years, but the same cannot be said for a private company. Executing an IBM-style turnaround — rather than a Dell or DEC-style slide into oblivion — is longshot prospect for any executive.

Now that HP has a new CEO, it needs a new board. As I wrote a month ago, HP’s board consists of

Two insiders, three private equity investors, a failed startup technologist turned investor (Mark Andreessen), a former consumer products exec (Meg Whitman), execs of two failing telecom companies, the CEO of a successful software lock-in business, CEO of a major consulting company, chairman of a specialty chemicals business, and Larry Elison’s longtime sidekick (turned nemesis and Kleiner Perkins managing partner).

In many ways, it resembles the Apple board during the Jobs-free interregnum, where being on the board was the best job many of these people had ever enjoyed. Apparently others are finally joining Vitaliy Katsenelson of Seeking Alpha and me in noticing the board that can’t shoot straight — as this Reuters article Thursday:

Interviews with insiders, former executives and experts paint a picture of an ever-changing roster of board directors who lacked a good grasp of the company's fundamentals and vacillated over what its business should be.

Having a weak board has suited the goals of the last six HP CEOs, but shareholders have been cheated out of a fair return for their investment. If Whitman is really going to save HP, she needs to swap out the indecisive with actual competence. There should be others that share her (nominal) passion for saving this Silicon Valley legend, rather than just enjoying the sinecure. Let’s see if the institutional investors also push for a better board, or merely mark time for the opportune moment to dump their shares.

But in upgrading the board, Whitman and HP also need to confront a fundamental strategic question that the company has been avoiding for a decade: is it an enterprise company like IBM, or a consumer company like Apple? It has not been effective competing with either. Instead, it become the leader in low-margin consumer PCs — a business both IBM and Apple eschewed and Apotheker said HP should dump.

So where will HP lead? I’m guessing it will try to get there by acquisition, but the next acquisition will have to be transformative, unlike 3Com, Palm, Autonomy — or for that matter, Skype.

HP's acts of desperation

Since last week’s huge news about HP I’ve been hoping to write something, but I was traveling and didn’t time to collect my thoughts. Even after five days, the news still doesn’t make sense, other than as the death throes (or at least mortally wounded throes) of a once-great giant.

Yes, HP has serious problems. It’s been unable to find a decent CEO since its founders (NB: Apple, Microsoft). Simultaneously chasing both Dell and IBM, it caught and passed Dell for a prize it no longer wants, while it seems unlikely to ever catch IBM (at least in my lifetime).

The HP board and CEO Léo Apotheker seem incapable of dealing with the current challenges. It has come to having HP’s chairman bad-mouthing Apotheker’s predecessor for “under-investment” in the core business.

But this is only the latest desperate effort in more than a decade of throwing one Hail Mary pass after another. Its $1.2b purchase of Palm and webOS was (as predicted) a major mistake. It allowed the (previously dying) Palm cellphone business to die, and meanwhile the efforts to establish the TouchPad as a viable iPad rival has failed miserably (much like RIM) with Best Buy selling less than 10% of those ordered and HP writing off $1 billion in losses on the webOS hardware business — most of that on the TouchPad.

Yes, a couple of things make sense from the announcements. Yes it’s time to cut the losses on the webOS acquisition (Perhaps claiming it has a future as a consumer embedded OS postpones the inevitable write-down, but competing against a no-royalty embedded Linux will be difficult at best.)

And at some level, the divorce of the low margin PC business from the potentially high margin software/services business has a business logic. Mark Hurd was the right man to run the commodity business while Apotheker prefers higher margin services, and neither was suited to run both together in a single company.

The problem is that the current HP is a conglomerate of the leading commodity PC maker, the leading (increasingly commoditized) printer maker, and a hodgepodge of largely second-tier software and services businesses.

Under Hurd, the company had embraced commoditization — executing on Carly’s Compaq acquisition and doing an exemplary job of competing in commodity markets. The only cost was the heart and soul of Bill and Dave’s company, ripping it out as the company shed workers, perks and the exemplary culture that once inspired Steve Jobs and Steve Wozniak.

Then the HP board panicked over Hurd’s poor judgement and forced him out, replacing the successful commodity numbers weenie with just the opposite: a software guy that was presiding over the dying SAP franchise. Apotheker had not solved SAP’s problems — coasting on the inertia of its once-invincible lock-in rents in the BPR segment — so he was rewarded with the reins of Silicon Valley’s oldest and most storied company.

A completely different CEO meant a completely different strategy, which in turn requires a different portfolio of businesses. (It also requires different competencies up and down the line, which the latest moves pointedly do not address.)

Even if exiting PCs now makes sense, as others have noted HP has completely bungled the planned PC spinout. IBM’s decision to sell its division came as a bolt from the blue with the buyer already announced. Apparently HP shopped the PC business and didn’t get its desired price, so now the uncertainty around the PC division (the born-again Compaq) will cause it to hemorrhage customers and market value until it’s finally dumped.

In the end, I have to lay the current problems on the board, which brought us the infamous spying scandal, melodrama over the last 3 CEO appointments and of course forcing out its best directors, Tom Perkins (of Kleiner Perkins fame) and George Keyworth. As Perkins noted in a 2007 video and his memoir, the board groupthink forced out any dissenting view — which (to further mangle metaphors) is a recipe for marching lockstep over a cliff.

Who’s on the board? Two insiders, three private equity investors, a failed startup technologist turned investor (Mark Andreessen), a former consumer products exec (Meg Whitman), execs of two failing telecom companies, the CEO of a successful software lock-in business, CEO of a major consulting company, chairman of a specialty chemicals business, and Larry Elison’s longtime sidekick (turned nemesis and Kleiner Perkins managing partner).

Oddly, while the board has exemplary gender diversity it lacks the obligatory university professor or president. I suspect Intel benefitted greatly from the advice of longtime director David Yoffie — even if I didn’t always agree with his analysis. (If HP goes looking for an academic, Tim Bresnahan of Stanford has understood the economics of platform businesses longer than anyone.)

Apparently I’m not the only one fed up with the HP board. After the 20% drop in HP stock Friday, fellow Seeking Alpha contributor Vitaliy Katsenelson wrote:

Anger and frustration are the two emotions pulsing through my veins as I write this. HP (HPQ), once the symbol of innovation, is being dismantled by its high-pedigreed board and the CEO of the hour. … [In] the early 2000s, when Carly Fiorina, then CEO of HP, engineered the HP merger with Compaq. … [N]ine years and two CEOs later HP has announced that the PC business, the one it so desperately wanted just a decade ago, is too hard a business and that it will look for ways to get rid of it. Almost in the same breath HP announced that it will kill WebOS devices, a business it acquired in April 2010 for $1 billion; and management, possibly missing the irony in those two announcements, went ahead and announced another acquisition, which this time will for sure transform the company.
…
I don’t need to have a great imagination to envision another conference call in August 2015, where a new CEO decides that the software business is too difficult, and HP needs to come back to its roots (maybe going back to making calculators) and will spin off the software business into a new company, take an enormous charge, and then maybe announce an acquisition that the same highly pedigreed board will rubber-stamp.
…
HP’s stock sold off not because the company disappointed Wall Street but because Wall Street grew tired of the overpriced “must-have” acquisitions. Wall Street has smartened up and assumed that this acquisition, as with many other “transformative” acquisitions, will do nothing of the sort.

I’d like to hope that HP will turn around some day, but I can’t see how to get there from here. It would require an entirely new board, one with more winners than losers and more big company operating experience. HP and its board are too big to be threatened with a hostile takeover, and so will muddle along — acquiring baubles with the shareholders’ checkbook — without a coherent long-term strategy or market niche.

HP-Compaq Redux

Many of the most senior professors I’ve ever met — including some prize-winning engineering professors I interviewed in my research — say that to really understand something that you need to teach it.

Tonight in the capstone strategy class, our undergraduates revisited the 2002 HP-Compaq merger. We had a very healthy discussion, which I concluded by summarizing from my “Carly is right, I was wrong” posting earlier this year, particularly this passage:

• Opponents’s Claim: The merger would increase HP’s exposure to the commodity PC industry. Reality: True.
• Supporters’s Claim: The merger would give HP’s commodity business cost advantages through superior scale. Reality: True. Under Hurd, HP is a better commodity PC maker than even Dell.
• Supporters’s Claim: The merger would help HP increase service revenues. Reality: False. What was left of DEC wasn’t worth much, and so in 2008 HP spent $14 billion to buy EDS.
• Opponents’s Claim: Adding Compaq would dilute HP’s printer cash cow. Reality: True, but it didn’t matter.

However, from the student presentations I gained a few new insights:

• Many “experts” (including me) say that prior IT mergers failed and thus HP-Compaq would fail (cf. WSJ, CNET, USA Today, AP, Red Herring.) However most of the acquired companies were clear losers (Apollo, Sperry, NCR) or firms whose category was dying (Cray, DEC). Compaq was the global market share leader from 1994-1999, and still had almost twice the share of HP.
• HP didn’t beat Dell in PCs, Compaq did (using HP’s money, brand and distribution). HP was never any good at making PCs.
• As my student David Sheyman pointed out, at the time of the merger Compaq’s ProLiant servers were the market leader, preferred by IT buyers.

Yes, the PC business is a brutal low margin commodity business, but if nothing else HP deprived Dell of a profit sanctuary for attacking HP’s other businesses.

Consistent with one of major themes of this blog, commoditization is the reality of most segments for Silicon Valley IT companies. Commodity firms are less fun to work to work for, so students have to recognize the industries and firms that have become commoditized if they hope to avoid them.

Commodity companies, commodity budgets

The WSJ Wednesday posted an interesting article (and also snippets of video) from its interview with IBM CEO Sam Palmisano. The videotape

The article reported:

Palmisano said he doesn't worry about companies such as H-P that have slashed their investments in core technologies and need to make expensive acquisitions to keep up.

"H-P used to be a very inventive company," Mr. Palmisano said in an interview at a Wall Street Journal event on Tuesday. IBM would never have paid what H-P did to buy data-storage provider 3PAR Inc., he said. "[H-P] had no choice," said Mr. Palmisano. "Hurd cut out all the research and development."

Unfortunately, the WSJ doesn’t actually share the video of Palmisano making these points. However, in the opening part of the video clip, Palmisano says:

If you look at the core business of a Dell or HP, it’s an electronics distribution channel for Microsoft, Intel, and storage guys and everybody else. There's nothing wrong with that, we just don’t focus on it as much.

To his credit, reporter Spencer Ante quantifies the impact of HP’s brutal budget cuts as part of its shift from innovator to low-cost commodity player:

Mr. [Mark] Hurd cut H-P's research and development budget to $2.8 billion, or 2.5% of H-P's revenue, in its last fiscal year from $3.5 billion, or 4% of revenue, in 2005, when he took over as CEO. Under Mr. Palmisano, IBM has continued to invest about 6% of its revenue in R&D, including $5.8 billion last year.

Alas, the interview also retreads old ground as Palmisano calls PCs a dying industry. His comments are classic sour grapes: IBM dumped PCs because it proved itself unable to compete in that business, while HP has become the market leader. (Neither HP nor IBM has made a transition from PCs to smartphones or tablets, but unlike IBM HP has a plausible entree with its Palm acquisition.)
If the article is interesting and informative, the video snippets are neither. It’s painful to watch the actual news (i.e. comments by a leading tech exec) with insipid commentary by WSJ staffers.

If the WSJ is going to produce video clips, they need to learn PBS production values and hire some broadcasting professionals. Its AllThings D spinoff has done a great job packaging interviews from its annual conference, so perhaps it can provide the WSJ with necessary expertise.

Hurd mentality

Noting Dell’s problems with its commodity business model, on Aug 19 I wrote:

If they need a commodity IT turnaround specialist, I know just the guy: Mark Hurd. He’s turned around two companies already — NCR and HP — and now finds himself unexpectedly with time on his hands.

On Sunday night, the FT (and a herd of other news outlets) reported:

Oracle’s board will meet within days to vote on a deal to bring Mark Hurd to the company in a top role, marking a rapid corporate rehabilitation for the ousted Hewlett-Packard chief executive.

Mr Hurd is unlikely to win the title of chief executive, which has been held since 1977 by Larry Ellison, Oracle’s founder and chairman, who owns about a quarter of the database software giant. But almost any position would represent a coup for Mr Hurd after HP’s board forced him to quit the company he had led for five years.

One fit is obvious. As the FT notes, Ellison himself stood up for Hurd after HP forced out its CEO on Aug. 6:

Mr Ellison is personally close to Mr Hurd and has supported him in public comments, calling his dismissal “the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago”.

However, the more important fit is that Hurd revitalized a portfolio of mature, no-growth businesses by slashing costs, people and morale — executing on the imperfectly realized vision of Carly Fiorina.

If you want someone to find short-term efficiencies in a mature 21 tech firm, Hurd’s your man. (We have no evidence either way as to their effects on long-term competitiveness.)

Presumably Oracle poses less non-compete problems than Hurd would have faced going to Dell (not that Michael Dell was going to bring in another ego as big as his own.)

But this presumably would be a negative for Oracle employees, who have already faced considerable cuts after the acquisition of Sun Microsystems.

Update, Monday 9:30pm: Hurd has been named as one of two Oracle co-presidents — replacing Charles Phillips — and reporting to CEO Larry Ellison.

Mark Hurd for CEO

Levi Sumagaysay of Good Morning Silicon Valley (the Merc) has a wonderful summary of Dell’s many woes, including unhappy shareholders, a $100m fine to the SEC, allegations of shipping defective computers and a recall of servers infected with malware.

Some of this is just normal bad news and some of it suggests a lack of attention to execution that was once Dell’s hallmark and source of competitive advantage.

However, the revelation (and SEC fine) of Dell’s financials from 2002-2006 were inflated by $1+ billion in “loyalty payments” (kickbacks?) from Intel suggests that the core business has been in trouble for a while, as rivals like HP have copied Dell’s once-unique operational efficiency (and as the model has broken down with the rise of laptops).

Michael Dell’s return as CEO in 2007 was assumed to be the solution to the company’s post-bubble woes, but so far the second time around has been much harder. Given the no-confidence vote in Mr. Dell by 25% of the company’s shareholders, perhaps it’s time to find a new CEO.

If they need a commodity IT turnaround specialist, I know just the guy: Mark Hurd. He’s turned around two companies already — NCR and HP — and now finds himself unexpectedly with time on his hands.

Yes I know that Hurd probably has a non-compete clause, but under California law (where HP has its headquarters) it’s difficult to enforce them except under very narrow circumstances. (Ex-Compaq CEO Michael Capellas — jettisoned by Carly Fiorina after the acquisition — is also available, but nothing in his resume suggests he is prepared for today’s brutal commodity price wars.)

So hiring the now-tarnished Hurd might be seen as risky, but desperate times call for desperate measures. He’s still as talented as he was a year ago, and the 134% increase in share price during his reign is unmatched by big tech CEOs not named Steve.

Perhaps the outside directors of Dell should give Mr. Hurd a call: he lives in Atherton, Calif.

Growing old is tough

HP’s latest announced job cuts repeat the lesson of its past decade: financial health is coming at the cost of employee security.

A chart in the Wall Street Journal article illustrates how CEO Mark Hurd is trying to raise the company’s operating margin to 10% — a figure achieved only once, at the end of 2009. The WSJ also reports that cutting 9,000 workers — implied to be largely from the 142,000 workers who came with the purchase of EDS — will create a $1 billion charge and a predicted $500-700 million/year in savings.

Meanwhile, the online headline for Merc columnist Chris O’Brien takes a more provocative view:

HP increases its leading product: Ex-HP Employees

The headline on page C1 of the dead tree version is more tame: “Innovation, alas, is no longer the HP way”, but both recount the $45 billion in acquisitions and 93,000 layoffs since the Agilent spinoff in 2000 left HP with 88,000 employees.

While Silicon Valley is conceived as a center of innovation, O’Brien writes:

HP's strategy forces us to acknowledge that success in the technology industry can also be gained through methods we tend to associate with old, tired industries. Buy a company. Cut costs. Trim employees. Repeat.

Indeed, HP has reclaimed its position among tech's elite companies during a decade in which it failed to produce a single, signature innovation.
…
When you think HP, you think "Compaq merger" or layoffs. Consolidation is the brand.

What I think the article fails to put in perspective is that the IT industry — what people normally associate with “Silicon Valley” — has reached middle age. Tech is not as old and tired as cars and steel, but its Fortune 500 companies are neither young nor vigorous.

Overall, tech “growth” is negative, cost-cutting is king, pressure on margins is relentless. HP’s buy-and-cut strategy resembles Oracle and other mature enterprise-oriented companies. It’s not HP — it’s the industry. Commoditization in mature industries means that cuts are standard operating procedure.

Apple (right now) is pursuing a different path, but that’s the exception that proves the rule. Apple is venturing into consumer electronics, where there are plenty of old-line CE firms that are either cutting or even fading away.

This reminds me of the old saying that acquired personal relevance when I personally reached middle age: Growing old is tough — but it beats the alternative.

HP's curious acquisition

I’m still not sure why HP spent $1.2 billion to buy Palm, other than it can. Yes, it has a minimal presence in mobile phones and other mobile devices, leading MarketWatch’s Therese Poletti on March 2 to predict an HP purchase of Palm:

Surely numbers-driven Chief Executive Mark Hurd is looking for ways for H-P to take advantage of the boom in smartphones. Buying Palm could be a way for H-P to get into the market for lower cost devices. It might have to abandon Windows, or offer two families of devices. H-P has often juggled competing product lines, diverse chip architectures and operating systems.

With its cash and global reach, HP can certainly do more with Palm’s technology that Palm has been able to do. And yes, Palm was available cheap, losing 73% of its market cap since its recent peak stock price of $17.07 last October.

It was a great victory for Palm and its investors, which despite good technology has been given up for dead for nearly two years. Elevation Partners, which took 25% sake in Palm three years ago, cashed in its (now) $460 million investment for an estimated $485 million — suggesting that it was worried about further deterioration rather than optimistic about a future upside. (Wednesday, Palm revealed Q2 revenues were expected to be 40% below analyst expectations, which would have punished the stock further.)

Obviously HP has been looking forward to the day when smartphones and other devices start to eat away at the Windows-based PCs that account for a nearly a third of the company’s revenues.

HP claimed the acquisition is even about the post-smartphone world:

"Smartphones are a part of this, but this is really about the Web operating system," Shane Robison, HP's chief strategy and technology officer, told Forbes. "It's a change in our business model to a connected device model." HP, he said, is assuming a world in which almost everything needs at least the potential to connect to the Internet.

But by taking on Palm and its webOS, HP is going down path it’s almost completely avoided during its 40+ years as a computer maker — as a sponsor of a proprietary computing platform.

Yes, it sold proprietary 16-bit mini computers in the 1970s, and it also bought two leading proprietary minicomputer companies: Tandem and Digital Equipment (when it bought Compaq).

However, its PCs have been DOS and Windows, and its servers Windows, Unix and Linux. The Unix (HP-UX) had its own development group, but the recent trend by HP and its customers has been away from HP-UX to Linux.

Of the world’s top five PC makers — HP, Dell, Acer, Lenovo and Toshiba — all have made mobile devices based on Windows Mobile (now Windows Phone) and Android. HP now seems to be abandoning this model and casting its lot with the leading proprietary vendors: Apple, Nokia and Research in Motion. (Yes, the operating system Nokia controls is open source, but its competitors are largely ignoring it.)

This also means that HP hopes to use webOS to differentiate its mobile products, rather than merely shave pennies off of operating costs as CEO Mark Hurd loves to do. Perhaps the thought of competing against commodity Taiwanese and Chinese firms in the mobile segment prompted him to do something different.

It’s really too soon to say whether HP will have any luck here. However, in the short-term, I think the biggest negative is for Google. A lot of people have been assuming that Android will take over the world, coalescing all the various carriers, vendors and users into a single platform. Instead, fragmentation of mobile phone platforms — as well as tablets — will continue.

It‘s also bad for Microsoft and Dell. Perhaps this will be the nudge that gets Microsoft out of the handset OS business, or it may cause it to more aggressively ally with Dell (which previously aligned with Android.)

But in a perverse way, I think in the short-term it will be good for the other proprietary platform vendors. Together, Nokia, RIM, Apple and HP will be able to hold off Android, and may cause the other phone makers to reconsider whether they want to hand control of their future to Google.

The one sure thing is that the number of webOS applications is going to explode. The iPhone (nearly 200,000) and Android (around 40,000) application stores are already crowded, while webOS only has a few thousand. Developers looking to get noticed will flock to webOS, hoping to get in on the ground floor now that its survival is no longer an issue.

Because of this demand — and because the webOS tools are very friendly — I predict that HP/Palm will have more than 5,000 apps by the end of the year, and perhaps closer to 10,000 apps.

Cutting their way to greatness

A company in a downward spiral can never cut its way to greatness — and rarely even to survival. Yes, it should throw losing products and divisions over the side, but in the end, it will never survive unless it can find some profitable core operations — and continue to build and build upon those operations.

Two examples come to mind. During a run of miserable CEOs, Yahoo was cutting left and right but not building anything. Now Carol Bartz has defined the core focus of Yahoo as a consumer media company. Who knows, it might even work, but at least it’s a plausible shot at turning around a company that’s fallen long and hard.

The other example is HP, which made a wrenching (but successful) shift from an innovative company to a cost-cutter, as designed by Carly Fiorina and implemented by Mark Hurd.

Washington Examiner contributor (and law school professor) Glenn H. Reynolds offers a counter-example of how not to do it, using a once-storied beer brand: Schlitz.

When I began drinking in college — the pre-Jimmy Carter drinking age was still 18 — the word “Schlitz” had become synonymous with swill. The epitome of this was a fellow Baker House freshman who was so cheap and so intent on getting blitzed on weekends that yes, he’d even drink Schlitz. (Today I can’t even finish a Coors, let alone a Bud — give me a Firestone IPA.)

But apparently Schlitz was once a premium beer. Reynolds explains its self-inflicted slide into oblivion:

Schlitz was once a top national brew. But, in search of short-term gains, it began gradually reducing its quality in tiny increments to save money, substituting cheaper malt, fewer hops and "accelerated" brewing for its traditional approach.

Each incremental decline was imperceptible to consumers, but after a few years, people suddenly noticed that the beer was no good anymore. Sales collapsed, and a "Taste My Schlitz" campaign designed to lure beer drinkers back failed when the "improved" brew turned out not to be any better. A brand image that had been accumulated over decades was lost in a few years, and it has never recovered.

The rest of Reynolds’ column would probably raise hackles here in Silicon Valley — a small government criticism of the Federal government’s self-inflicted damage to its own credibility and legitimacy.

Still, Schlitz provides a great lesson illustrating a key point I teach my students about strategy: make your strategic choices internally self-consistent.

Penny-pinching for a premium brand can be done — as Apple did in the late 1990s, when it fixed its production and supply chain cost disadvantages. However, it’s always a tricky combination to pull off. The only two ways I’ve seen it work is to do what Apple did (favor quality over cost), or what HP did (accept commoditization and switch to a generic low cost strategy).

Carly reconsidered (II): she was right, I was wrong

Even before her November announcement that she was running for the US Senate on a pro-business platform, I had begun to wonder whether I needed to reconsider my long-time antipathy to former HP CEO Carly Fiorina.

I hadn’t thought about Fiorina in years until she announced her candidacy. I also ended up examining new information when I had my students examine HP’s recent business during all three of my courses last fall.

In fact, in the face of new information, over the past few months I’ve had to admit that I was wrong (at least in part) about Fiorina’s strategy, even if I have no new information about her winning personality.

Destroying the HP Way
During her tenure at HP (July 1999-February 2005), I thought she was destroying the company. As an HP contractor — with my company at one point supplying most of the Mac software for HP’s inkjet printers — we worked closely with HP engineers and watched the company cut quality to save pennies. The engineers who wanted to make great technologies like those that had made the company famous were getting shoved aside by boot-licking MBA types that would do Fiorina’s bidding.

Carly’s top priority was obliterating the “HP Way” — to break the culture of Bill & Dave and remake it in her own image. A symbolic example was the mandate that every voicemail recording proclaim “The New HP” — to the point that if a worker didn’t change his/her voicemail, her manager would do so. At the time, this seemed like a massive ego-driven (successful) effort to get her face on the cover of Forbes, Fortune and Business Week.

Fiorina’s signature proposal — and the flashpoint for opposition to her — was the 2001 Compaq acquisition, then sold as a “merger.” I agreed with Walter Hewlett — and HP hagiographer Mike Malone — that the “merger” was a terrible idea. On March 19, 2002 — a few months before taking a job here in Silicon Valley — I even flew up to the shareholder’s meeting where employees and shareholders voiced their futile opposition to it.

The merger went through, I commiserated with my HP friends about how terrible the merger and culture change were, and shared in their schaudenfreude when the resulting acrimony cost Fiorina her job.

The initial results of the merger were inconclusive, and after railing against Carly in my undergraduate strategy class from 2002-2003, I lost interest and went back to studying open source and later mobile phones.

Carly, Mike and Mark
HP’s finances have turned around around under the operational focus of Mark Hurd, CEO since 2005. Current employees say that Hurd is really just executing on Fiorina’s strategy — he’s providing the execution skills that Fiorina lacked (but might have had available if she’d kept Michael Capellas around.)

How has Hurd done it? Reporter Chris O’Brien decided to answer that question by reporting facts that have been sitting in plain sight. As he wrote in Sunday’s Merc:

When their companies stumble — as HP did in the 1990s — most CEOs generally use only two strategies to fix things: fire lots of people, or buy another company.

Beginning with the arrival of Carly Fiorina in 1999, and continuing under her successor, Mark Hurd, HP has undertaken a staggering transformation, as it pursued both strategies with a vengeance.

What O’Brien found interesting is that (according to SEC filings) HP has fired 75,505 employees over the past decade, a number expected to hit 84,000 by the end of this fiscal year. (HP had 88,000 employees in 2000).

O’Brien continued

Why do I find HP's job cutting so extraordinary?

First, let's start with some context. To find job-cut numbers of this magnitude, you have to look to the automotive or airline industries. General Motors, for instance, has announced 195,000 jobs cut since 2001, according to outplacement firm Challenger Grey & Christmas, and Delta Air Lines announced cuts of 51,154.

But when we talk about those industries, we talk about failure. As they dance in and out of bankruptcy and receive government intervention to stay afloat, we wonder whether they will collapse completely.

By comparison, HP is a fairly healthy company.

O’Brien’s reporting is remarkable, because the overall magnitude of the job cuts has been ignored for a decade. It hasn’t gone unnoticed by current (and now-former) HP employees, who have been whispering about the massive layoffs and the end of the former culture for years — as well as the use of the current economic crisis to cut salaries permanently.

Commoditizing HP
In 2000-2002, I thought Fiorina was destroying HP’s traditional business model and turning it into a commodity, low-innovation company. As both an engineer and an academic researcher, I felt she was destroying the great engineer-driven culture of the founders and replacing it with a by-the-numbers, penny-pinching, bean-counting mentality.

It turned out that I was right, because that’s what Fiorina (and then Hurd) did: end what had made HP great.

The problem with my argument was that I assumed that HP had a choice. In retrospect, it didn’t: Fiorina saw this and I didn’t.

HP during its heyday created the HP 35, various minicomputers, workstations, calculators and other innovative products. (That’s not counting the test instruments that Fiorina’s predecessor dumped into Agilent in 1999). There were many opportunities for innovation, and HP exploited them.

However, the reality is that overall IT industry growth ended with the NASDAQ peak of March 2000, and since then the industry’s revenues have been about replacing existing products rather than growing its overall share of the economy.

These issues were highly salient in the arguments for and against the Compaq merger. Re-examining the claimed costs and benefits of the merger:

• Opponents’s Claim: The merger would increase HP’s exposure to the commodity PC industry. Reality: True.
• Supporters’s Claim: The merger would give HP’s commodity business cost advantages through superior scale. Reality: True. Under Hurd, HP is a better commodity PC maker than even Dell.
• Supporters’s Claim: The merger would help HP increase service revenues. Reality: False. What was left of DEC wasn’t worth much, and so in 2008 HP spent $14 billion to buy EDS.
• Opponents’s Claim: Adding Compaq would dilute HP’s printer cash cow. Reality: True, but it didn’t matter.

It was this last point that I should have seen coming as someone who spent almost 15 years working full-time writing printer software. I had a front-row seat watching the commoditization of HP’s printer business as it was dragged into price wars with Epson. Its HP DeskJet 900 of 1999 ($400) — strong enough for our toddler to sit on — was supplanted a couple of years later by the disposable HP DeskJet 3300 ($100).

In retrospect, the period from about 1984-1999 was a period of rapid innovation for inkjet and laser printers. HP was able to gain competitive advantage by being only a few years ahead of its rivals at a time when a few years mattered. In 15 years, HP went from a 96dpi monochrome printer (the 1984 ThinkJet) to a 300 dpi monochrome printer (the 1988 DeskJet), and then a decade later to 600 dpi color with the 1999 DeskJet 900. While dozens of new models have been created since then, chances to offer users dramatically better print quality have not.

In other words, there was 15 years of innovation-based differentiation, but when opportunities for meaningful differentiation disappeared the emphasis of necessity shifted from innovation to cost cutting. With or without Carly Fiorina, around 2000 it was clear that HP’s printing margins were eventually going away, and new sources of revenues were needed to replace them.

Conclusion: Carly Was Right
Fiorina and Hurd have destroyed the old innovative, employee-friendly HP. The HP that once had a no-layoff policy has fired a quarter of its workers. The company that once had great labs and R&D is now a commodity, penny-pinching company that’s trying to (and succeeding at) out-Delling Dell.

Alas, commoditization is the future of the ICT industry: it’s happened to HP, Dell, Sony, Toshiba, Acer, Lenovo making PCs, and HP, IBM and Sun making larger computers.

Even with its quasi-monopolies, Microsoft is having to worry about open source, SaaS and other price pressures as it’s unable to add new features that buyers will pay for. IBM, SAP, Oracle, and other firms are facing the maturation of the industry and limited growth.

Meanwhile, the one type of computing devices that have recently witnessed dramatic innovation and growth — smartphones — are at the brink of commoditization if (as predicted) Android doubles its market share in 2010.

There’s only one differentiated systems company left — and that only as long as Steve Jobs is healthy. For most of the remaining IT industry, such differentiation is but a pipe dream: it’s either make commodity products cheaply or lose money.

Under Bill & Dave, HP was an engineer’s paradise that was a role model for what a Silicon Valley company should be, at one time emulated by Apple and the other startups of the 1970s and 1980s. Under Mark Hurd, HP no longer makes the lists (like Fortune’s) of the best companies to work for — while higher margin companies like Intel, Microsoft, Intuit and Qualcomm do. (Interestingly, neither Apple nor IBM make the lists anymore, even though their respective financial positions over the past decade have been much more secure than HP’s.)

So while I accurately diagnosed Fiorina’s impact on HP employees and their morale, I completely missed that the environment was changing under HP’s feet and it had to change with it. As an engineer, entrepreneur, researcher and teacher whose career spanned the glory years of the PC and the Internet, it took me several years to recognize (or admit) that the world had changed forever.

The IT industry has become a slow/no-growth mature industry where commoditization is the unescapable reality. Economies of scale and scope are the only hope for even successful differentiated companies like Google to maintain their lead.

Now I admit it: Commodities are HP’s future, and recently it’s been working well. Today, the only alternative seems like more of the same — good for shareholders, but bad for employees.

HP doubles down on services

On Tuesday, HP closed its $14 billion acquisition of EDS (Electronic Data Systems), the former powerhouse of IT services founded by Ross Perot. The acquisition is the 2nd largest for HP, after its $20 billion purchase of Compaq in 2002. (Ex-Merc report John Paczkowski makes a snide comparison on the WSJ blogsite).

The Merc reports that HP had 172,000 employees and has added 140,000 EDS employees. An unspecified number of the latter will be axed when CEO Mark “Mr. Efficiency” Hurd makes his Sept. 15 analyst presentation.

However, I have to quibble with one adjective in the report:

The massive deal, which HP says will expand its business in the lucrative field of technology consulting and outsourcing services, is the company's biggest acquisition since HP bought Compaq for nearly $20 billion in 2002.

HP had profits of $7.3b on revenues of $104.3b, or a net after margin of 6.97%. EDS had net income of $0.7b on revenues of $22.1b, or a net after margin of of 3.2%.

Services are high growth, but they’re not high margin. They may even become a commodity as services expertise becomes more widely dispersed.

The oft-drawn parallels to IBM are apt: IBM has also bet heavily on services, and HP is following them to the promised land (or over the cliff).

HP buying EDS

To increase its services revenues, HP confirmed it is buying EDS for about $14 billion. They’ve been down this road before.

In the fall of 2000, CEO Carly Fiorina was going to spend $18 billion to buy PWC, but then gave up a few months because it was too expensive. After the end of the bubble, IBM bought PWC for $3.5 billion, and was almost immediately successful in making things work

Increased exposure to services was a major factor behind the 2002 Compaq acquisition that nearly destroyed HP and cost Fiorina her job. More recent analysis claims that the merger was a success, some of that with insiders arguing their case after Fiorina’s departure. (Whether the merger made sense or not, the process for making it work set a new standard for the rest of the industry to follow.)

As Business Week points out, EDS (like Compaq) has fallen far from its heyday. The company has been in serious trouble for nearly six years. In September 2002, it announced an earnings shortfall of 80%, prompting a strike price lawsuit after its stock lost two-thirds of its value and its credit rating approached junk bond status.

Now, the hometown paper writes:

For EDS, the deal represents a chance to cash in after years of cost cutting and reorganization failed to give the company's shares much of a lift.

For H-P, an acquisition would boost the company's ability to compete in the services area with rival IBM Corp.

And for EDS employees, the purchase almost certainly means at least some job cuts.
...
Peter Bendor-Samuel, founder of Everest Group, a Dallas consulting firm that helps companies do business with outsourcers such as EDS, said EDS is a mature company.

While the company is widely recognized for its expertise, chairman, president and chief executive Ron Rittenmeyer hasn't been able to boost the stock price, Mr. Bendor-Samuel said.

"Ron has been running the game plan to take costs out of EDS, but you can't cut your way to greatness, and quite frankly the stock has languished," he said.

"There's really nowhere for EDS to go," he added. "They can do minor acquisitions, but it's hard to see how that drives stock prices."

Mergers to increase scale are common in mature industries, although Fiorina (a modern-day Ahab) was obsessed with surpassing IBM’s scale in hardware and services. Mark Hurd seems to share those goals.

Under Fiorina and now Hurd, HP increasingly looks like a slow-growth commodity company that grows via acquisition rather than organic market creation. In that light (so to speak), the photonics summit that HP hosted Monday would be more about gaining licensing revenues for HP’s patents than enabling HP to differentiate its products through the use of photonics.

HP's "open innovation" gambit

In March, HP reorganized their labs to re-emphasize "open innovation". At the time, I said “all we can do is wait and see.”

This week HP got a splash in the local papers when it announced an RFP for its new “Innovation Research Program.” Each of the seven HP regions have their own preferred research topics, totaling 49 overall. Among the 31 topics for “Americas” are social computing, networks on demand, exascale datacenters, personalization, and a number of semiconductor and materials topics. Other regions have shorter (non-overlapping) lists: EMEA has eight topics, including four about information/knowledge management and two on security.

The story was covered by the Chronicle, the Merc and CNET, among others. All featured Rich Freidrich, director of the “Open Innovation Office” (which apparently was reorganized from the university relations office). Internal HP blogger Jamie Beckett interviewed Friedrich:

"I want to use this office to partner with some of the brightest minds in the world," Rich says.

He also hopes to change the way HP and its partners collaborate and to explore using Web 2.0 social networking tools to pursue and support research.

'I'm interested in what a Research 2.0 world looks like," Rich told me.

"How do we build a research community that combines the deep technical expertise of university professors, the deep domain knowledge of industry and the financial resources of government to solve the pressing problems of today and set the agenda for tomorrow?

And how do you do it in a way that you harness collective wisdom and create a really vibrant community?"

As the blogger notes, HP has been partnering with universities for years. In fact, I attended a workshop last month (hosted by UC Santa Cruz) in which one of the HP university account managers (now with the OIO) talked about best practice of working with universities, including his own journal article on the subject.

Clearly there is a continuity between HP’s long-standing university ties (going back to Terman, Hewlett and Packard) and its efforts to introduce open innovation into its R&D activities.

"Reorg" of HP Labs

All day I’ve been trying to make sense of HP’s announcement Thursday that they’re reorganizing HP Labs. This is the official announcement:

HP today announced that it has sharpened the focus of its advanced research group, HP Labs, to address the most complex challenges facing technology customers in the next decade. ...

The redesign of HP Labs is intended to balance exploratory research with an entrepreneurial approach so breakthrough technology can be transferred more rapidly into commercial applications for customers.

HP Labs will pursue 20 to 30 large research projects – instead of the 150 smaller projects in the past – based on insight gained from newly expanded relationships with universities, partners, customers and venture capitalists.

At one level, it looks like a cut although there are pledges to keep up head count and funding. The 600 researchers are expected to focus on 23 areas instead of the 150 earlier projects; supposedly the priorities are being set by researchers.

CEO Mark Hurd was quoted as saying of the labs “It's one place where there is still R left in R&D.” Despite this, the press release and news accounts strongly suggest an increased emphasis on near-term results, and thus a shift from advanced research to applied research.

To me, one of the more interesting tidbits was a decision to embrace open innovation:

HP Labs has established an Open Innovation Office responsible for deepening HP Labs’ strategic collaborations with those in academia, government and the commercial sector. The office is designed to ensure joint research endeavors result in high-impact research that meets the scientific and business objectives of HP and its partners.

As part of this initiative, an Entrepreneur in Residence Program is being established to give venture capital investors and their portfolio companies early access to HP Labs research. In return, HP will receive insight into emerging market trends and potential business development opportunities.

HP’s interest in open innovation is personally gratifying, given my personal stake in the subject. And the idea of collaborating with academia, government and other firms seems like the right way to go about it.

Still, given all the HP mismanagement of the past 15 years, all we can do is wait and see. HP was once the shining exemplar for innovation excellence in the valley, and now (for better or worse) that mantle has passed to Google. So I’d like to think the new innovation strategy will increase effectiveness, but past results give reasons to be wary.

HP wants to make smartphones, too

Lost in all the noise of Apple’s intro, HPQ unveiled a passle of iPAQ PDAs on Wednesday. All run some derivative of Windows CE and have WiFi, but I think the segmentation is a little more clever than that. At the high end of the product line are two smartphones:

• the iPAQ 910 or 914 (910 is US): a GSM Windows Mobile 6 smartphone with a Blackberry-style keyboard.
• the iPAQ 610 or 614: ($600) a GSM Windows Mobile 6 smartphone with a 10-key pad.

They also have the iPAQ 310/314 ($450) which is like a portable GPS (with a 800x480 touch screen) running Windows CE 5.0. All three replace earlier models in these segments. Overall HP is targeting RIM and its Blackberry product line. However, HP badly trails both RIM and even struggling Palm in global PDA sales.

Microsoft has always wanted more impact on the US smartphone market, but it seems that their Windows Mobile sales leaned towards the carrier-branded (ODM-made) phones like the HTC 8525 even though Cingular also carries HP, Palm and Samsung WM phones. HP née Compaq is Microsoft’s best known licensee, so these new iPAQs have the potential to put portable Windows Media players into more hands than ever before. (Particularly if HP could someday leverage its PC distribution in Office Depot and Best Buy to sell smartphones).

Also on Wednesday, Microsoft quietly announced a price cut of its 30gb Zune MP3 player from $249 to $199. As Bloomberg reports:

Microsoft has sold more than a million Zunes since the player went on the market last November, less than 3 percent of Apple's iPod sales over the same period.

“If they're going to grow the Zune, they're going to have to offer a viable alternative to what Apple is offering,” said Michael Gartenberg, an analyst at JupiterResearch.

Microsoft, based in Redmond, Wash., held 3 percent of the portable digital player market in the six months ended in June, compared with Apple's 71 percent, according NPD Group Inc.

Clearly Microsoft’s greatest handheld success has been with business users, not consumers. Since HP was selling about 1.5 million iPAQs a year with its obsolete product line, its new family could easily outsell the Zune.

Technorati Tags: HP, mobile phones, smartphones, Windows

Open Innovation at HP

Hewlett-Packard Company (not to be confused with Hewlett-Packard Development Company, L.P.) is one of the foundations of the modern Silicon Valley. Even if you accept the argument of Tim Sturgeon (who I finally met last week) that Silicon Valley began in 1909 with Federal Telegraph, no firm has had a more sustained impact on Silicon Valley than has HP.

Thus, it’s been kinda depressing to watch the company mostly flounder since Bill & Dave left. Once the valley’s exemplar of an empowering corporate culture and engineering-driven innovation, it has been fighting a three front war against irrelevance: the risk that a culture of empowerment becomes one of entitlement, the bureaucratic stultification of any Fortune 100 company, and the disease of management-by-spreadsheets (particularly during the tumultuous reign of Queen Carly I).

How do you shake things up and turn things around? Do you hire from within, which brought us Dick Hackborn (who nurtured the printing cash cow responsibility for the vast majority of HP’s profits over the past 15 years) but also two undistinguished CEOs, John Young and Lew Platt. Hiring from outside brought both Carly Fiorina (a disaster) and Mark Hurd (for whom the jury remains out).

Today the Merc (dead tree edition) ran a story (registration required) on Phillip McKinney, a blogger and VP and CTO of HP’s personal systems group. For most, his claim to fame would be convincing Hurd to spend a few hundred million buying Voodoo PC.

But the most interesting thing about McKinney is his effort to incubate new ideas through a formal process of open innovation, by creating the Innovation Program Office. McKinney seems to have a highly original take on internal incubation, one that just might make a difference in restoring the company’s once-great record of innovation.

From the Q&A (not yet online):

We actually ask that every initial idea has to be able to answer five questions. …

1. “Will this idea fundamentally change the customer’s expectation?” …
2. “Does this idea fundamentally change the competitive landscape?” …
3. “Does this idea fundamentally change the economics of the industry?” …
4. “Does HP have a contribution to make?” …
5. “Will this idea generate enough margin?”

While these are good questions, they have been studied before. I don’t know if McKinney has read Radical Innovation, the multi-year study out of RPI that focused on these questions. If not, he should.

Technorati Tags: HP, open innovation, R&D

Silly Palm Acquisition Rumors

A bunch of reporters are spreading the rumor that Palm is up for sale. While some claim Palm is in no hurry, others flatly predict Nokia is going to buy Palm. Yes, the Palm team is no longer as influential or generating the buzz it once did in the first years after the Treo’s introduction or even when Palm bought the Treo line.

Still rumors of Palm’s sale — like Apple’s imminent death a decade ago - appear to be greatly exaggerated. As Ed Hardy wrote last September:

Rumors that Palm is going to be bought out surface a couple of times every year, but these never turn out to be based on facts.

The timing for Palm seems wrong — yes if the ship were about to sink you’d want to sell while it’s still afloat, but thus far it doesn’t seem to be that bad. For 2007, Palm seems to have important new products coming, while it has recently enjoyed iPhone-like gross margins in excess of 30%. The stock has been in a trading range for nearly 3 years after recovering from the bottom in early 2004.

Perhaps Nokia has done poorly — particularly with US smartphone buyers, but the idea they would buy Palm is just silly:

1. Nokia already has a smartphone operating system and various BlackBerry-type phones.
2. Nokia knows how to make hardware, so nearly all of their recent acquisitions seem to be software. What would they do with the Palm OS software if they bought it? (See #2 above)
3. Has Nokia ever done a billion dollar acquisition? Last year’s purchase of Intellisync was less than $500 million, but Palm (at least for now) has a market cap of $1.7 billion.

4. Large technology acquisitions with incompatible technologies are usually a disaster. The only things that saved the HP-Compag merger were that a) some divisions were weak enough to shut down (e.g., Compaq peripherals, HP PDAs) and b) for some class of products (notably PCs) both companies use the same technology.
5. When acquisitions (rarely) makes sense, usually it’s to acquire smaller firms that are into markets where they aren't — when it's quicker to buy in than to work your way in (A good example is Cisco getting into the home market by buying Linksys). Nokia has an unusually broad range of products, so there would be considerable duplicated and wasted technology.
6. Silicon Valley firms don’t well when acquired by outsiders.
7. As the biggest handset maker, Nokia would face certain antitrust review, and could face particular problems over the combined smartphone share.
8. Nokia has exited CDMA phones and will be unwilling to give Qualcomm any negotiating leverage until the current impasse (with Nokia’s threat to not renew its agreement to pay Qualcomm W-CDMA royalties) is resolved.

The rumor of an acquisition by Motorola is a little more plausible:

1. In its best years, Motorola has had a Silicon Valley-type culture, and its middle management is trained at Northwestern, which is certainly similar to many of the other practically-oriented among the top business schools.
2. Motorola doesn’t have much of a smartphone platform strategy. The first decent smartphone in years is the Windows-based Q. In 1998, they were one of the earliest Symbian shareholders but later dumped their shares: now all they have to show for it is three discontinued phones and one current mode (although the forthcoming Motorizr Z8 could be a serious entry.)
3. Motorola was once interested in Palm OS (for which Palm now owns rights). In response to their smartphone problem, 1½ years ago Motorola thought it had bought PalmSource — which would have been a better fit than then the actual outcome.
4. Both Motorola and Palm are trying to use Linux for the lower layer of their respective platforms.

But if anyone makes sense as a Palm buyer, IMHO it’s HP. Palm is eight miles down El Camino Real from HP and its culture is heavily influenced by Apple (whose founders first worked for HP). And HP is trying to get into the cell phone business.

Technorati Tags: acquisitions, HP, mobile phones, Nokia,Palm

HP’s Cell Phone Entry: Déjà Vu All Over Again

At the 3GSM World Congress, HP has introduced the iPaq 500, a GSM/Edge smart phone using Windows Mobile 6. The Washington Post headlined this “HP Enters the Cell Phone Fray,” but I was sure I'd heard this song before. And I had — in 2004.

Why does HP keep entering the mobile phone market, a brutal commodity business that’s in the midst of a shakeout? Who do they think they are, Apple?

Not surprisingly, HP’s entire mobile phone strategy is drafting on Microsoft — because the iPaq division is one of the few parts that HP kept from Compaq, a slavish Microsoft loyalist. So while HP (California) is a big Linux fan — and might be tempted to dive into the more difficult task of making a Linux mobile phone — it makes a lot of sense for HP (Houston) to use an open innovation strategy until they figure out whether they stand a chance in this market.

Windows Mobile is part of Microsoft’s long-standing Windows Everywhere campaign that mainly appeals to large corporate IT managers, so it’s plausible for its major systems partners to support the full range of products. But then IBM was running a money-losing PC division under the same theory until they decided synergy was too expensive and outsourced the losses.

Technorati Tags: HP, mobile phones, open innovation, Windows Mobile