Article from DOW JONES NEWSWIRES
Hewlett-Packard Co. (HPQ) is following the lead of rival International Business Machine Corp. (IBM) in possibly shedding its personal-computer business and focusing more on higher-margin operations like analytic software–but the transition is not likely to be easy.
H-P is significantly farther behind in the software market than IBM was when the Armonk, N.Y., company sold its computer business to Lenovo Group Ltd. (LNVGY, 0992.HK) in 2005. And since then, the value of PC assets has declined, meaning the world’s biggest computer maker may not get the cash boost needed to catch up with the software leaders ahead of it.
For IBM, its move last decade has worked out well. While other tech companies have seen volatility from their consumer exposure, IBM has posted consistent results, even during the depths of the recession. The company last month boosted it outlook for the year, helping send shares to an all-time high.
“IBM is the best-positioned of the big tech companies by far,” Gleacher analyst Brian Marshall said. “The majority of revenue comes from high-margin, annuity-type revenue streams such as software and services. … IBM has a phenomenal business model, and H-P is trying to follow in those footsteps.”
H-P is taking a big step Thursday by agreeing to buy U.K. data-analytics firm Autonomy Corp. (AUTNY AU.LN) for more than $10 billion. Analytics software, a fast-growing area, helps companies sift through massive amounts of information to solve business problems or make predictions.
“It’s the beginning of the transformation of H-P today,” Chief Executive Leo Apotheker said.
IBM has focused on analytic software for a while. Among the company’s dozens of acquisitions over the past five years, IBM has spent $14 billion on 24 analytics-related purchases. IBM expects the market for analytics to be over $200 billion by 2015, of which it sees getting about $16 billion.
Transitioning out of one big business and into another takes time and money. Since 2001, IBM has bought more than 127 companies for a combined total of $33 billion. Those earlier acquisitions helped to give IBM a strong software business–second only to Microsoft Corp. (MSFT)–when it sold the PC operations.
As a result, in IBM’s recently reported quarter, the company had software revenue of $6.2 billion, 23% of its total revenue. In comparison, H-P Thursday reported quarterly software revenue of $780 million, 2.5% of its total revenue.
IBM decided to get out of the PC market because the company viewed it as a commoditized industry where companies can only compete on price. Chief Executive Sam Palmisano said last year during an interview with the Wall Street Journal that he wouldn’t be able to give away IBM’s PC business today.
“We got a reasonable valuation for the company, and today I’d have to pay them to take it,” he said. “And the reason being is that the technology shifted, and we wanted to get out before it was obvious to everyone.”
During the same interview, he also criticized H-P, saying he’s not worried about a company that no longer invests in innovation. About 6% of IBM’s 2010 revenue went to research and development, compared to only about 2% at H-P.
H-P has said in recent months that it’s increasing its research spending.
Meanwhile, Mark Dean–one of the creators of the first IBM PC–said in a blog post last week that the PC age is essentially over, going the way of the typewriter and incandescent lightbulb.
“While many in the tech industry questioned IBM’s decision to exit the business at the time, it’s now clear that our company was in the vanguard of the post-PC era,” said Dean, who currently serves as chief technology officer of IBM Middle East and Africa.
Read more here.
WSJ reports: As Funding Dries Up, Fledgling Silicon Valley Firms Are Shutting Down; Fears of Chill on Innovation
Blog of Intellectual Capital 