The PC business may not be DOA yet, but it sure looks FUBAR. Personal computer shipments in the third quarter of 2012 dropped more than 8 percent from the same period last year, according to reports released this week by research firms Gartner and IDC.
"PCs are going through a severe slump," said analyst Jay Chou of IDC’s Worldwide Quarterly PC Tracker program in a statement announcing the new numbers. "The industry had already weathered a rough second quarter, and now the third quarter was even worse.”
Worse still, the worldwide PC shipments are set to decline in 2012 for the first time since the dotcom bust year of 2001, according to a report released Wednesday by analytics firm IHS iSuppli. The global PC market is expected to shrink by 1.2 percent to about 349 million computers shipped. “There was great hope through the first half that 2012 would prove to be a rebound year for the PC market,” IHS analyst Craig Stice said in a press release. That hope has been extinguished as back-to-school sales and consumer interest in sleeker new “ultrabooks” disappointed. “Optimism has vanished and turned to doubt, and the industry is now training its sights on 2013 to deliver the hoped-for rebound,” Stice said.
As consumers increasingly shift to mobile devices and tablet computers like Apple’s iPad – which are less expensive than most laptops – gain wider adoption, the PC industry continues to face questions about how and where to find growth. “A weak global economy as well as questions about PC market saturation and delayed replacement cycles are certainly a factor, but the hard question of what is the 'it' product for PCs remain unanswered,” Chou said.The third quarter drop was also due at least in part to the forthcoming launch of Microsoft’s Windows 8 operating system, scheduled to be released later this month – but it’s far from clear whether a new generation of software and lighter, more powerful designs will be able to stop the hemorrhaging.
And while the latest numbers detail the challenges the broader industry faces, they put one foundering PC maker squarely in the spotlight: Hewlett-Packard (HPQ). After six years as the world’s largest PC maker – and one year after Meg Whitman became CEO – HP has fallen behind China’s Lenovo, according to Gartner. The IDC report still had HP in the top spot but just barely, with a 15.9 percent share of the market compared to 15.7 percent for Lenovo. HP issued a statement defending its position: “While there are a variety of PC share reports in the market, some don’t measure the market in its entirety,” it said. “The IDC analysis includes the very important workstation segment and therefore is more comprehensive.”
But whether HP is first or second right now, the overall trendlines for the company are clear, and troubling. As the company searches for a new “HP Way” under Whitman, the company’s sixth CEO since 2005, its market share has fallen while Lenovo’s has grown. (Among the top five global PC makers, only Lenovo and Asus gained market share, while Lenovo and Apple gained share in the U.S. market.)
PC sales are far from the only problem at Hewlett-Packard, though. In a meeting with analysts earlier this month, Whitman said that the company had been hurt by years of turmoil in both executive leadership and strategy. “My belief is that the single biggest challenge facing Hewlett Packard has been the changes in CEOs and executive leadership, which has caused multiple inconsistent strategic choices and, frankly, some significant executional miscues,” Whitman told analysts.
Whitman presented a multiyear turnaround strategy for the company’s ailing businesses and she tried to sell her vision of a leaner, more focused company with fewer products and lower profits. “The two growth engines of our company are going to be the software business and the enterprise groups business,” Whitman said. HP had announced in May that its plans for streamlining would reduce its workforce of nearly 350,000 by about 27,000 employees by the end of fiscal 2014, and it increased that number by 2,000 last month.
Whitman emphasized that the company today is more diversified and less dependent on its printer business than it was 10 years ago, and she said the company would correct its “underinvestment” in research & development and information technology. “I can tell you that innovation is actually alive and well at HP,” Whitman told analysts. “My conclusion is not, in fact, that we don't have enough ideas or enough innovation. It's that we need to work a lot harder on getting those ideas productized and commercialized and into the market faster than we do today.”
But analysts came away from HP’s latest briefing disappointed – Whitman projected 2013 profits falling lower than analysts were expecting and said the turnaround would only start to be seen in 2014 – and HP shares sank to their lowest point since 2002. The stock has fallen 37 percent since Whitman took over. And while the company still posted more than $120 billion in sales last year, its market value has fallen from about $122 billion in April 2010 to around $28 billion today. Ouch.
“In our view, full value won’t be realized by just improving operations—structural change is required,” UBS analyst Steven Milunovich wrote in a note to clients a week ago arguing that the company should – and eventually will – break up into an enterprise business similar to IBM and a consumer business combining PCs and printers. “Based on HP's history we think Bill Hewlett and Dave Packard would support this approach.”
Whitman disagrees. “We are convinced that HP is better together with these four major lines of business that we now have and I'll tell you why,” she said. “If we can get it right, we're the only competitor that can go from the desktop to the data center, from hardware to software to solutions in a way that no one else can.” But whether they can get it right – and whether investors will have enough patience to let them try – still remain to be seen.