HP ANNIVERSARY - HP in street fight over PCs with Dell

When Hewlett-Packard (HP) edged out Dell Computer for the top position worldwide in PC shipments by the end of 2002, it achieved one of its goals when it announced its Compaq Computer acquisition. However, Dell was able to fight back and regain the top spot worldwide in the first quarter this year, setting up what promises to be a close race throughout the coming year.

HP's efforts toward integrating the different PC product lines was key to remaining competitive with Dell, as former HP and Compaq customers would have flocked to Dell had they felt HP emphasized the wrong products, said Toni DuBoise, desktop PC industry analyst for ARS Inc. in La Jolla, California.

Corporate customers were especially sensitive to potential problems with the product line integration, since they didn’t have the same brand loyalty to HP products that consumers did, she said.

HP pursued a dual-brand strategy with consumers, emphasizing the Compaq Presario and HP Pavilion desktops in different ways, she said. HP chose to make the Pavilion into its high-end consumer desktop machine, while the Presario line stepped down in terms of its available features, she said.

Loyal HP consumers tended to be techies, more interested in high-end features and willing to spend more for those features, she said. Compaq customers, on the other hand, were more interested in a budget PC.

This strategy will continue in the second year of the merged company, said Jim McDonnell, vice president for sales and marketing for HP's personal systems group. HP will sell the Compaq brand as the price-performance PC, and stack it up against companies such as Dell and eMachines Inc., he said.

The HP side of the consumer PC business will benefit from a focus on digital imaging, with several new products for home entertainment such as new Media Center PCs and other multimedia applications, he said. HP’s goal for the HP-branded PCs is to market them against other vendors that make high-end PCs, such as Apple Computer Inc. or Sony Corp., he said.

Although commercial PC customers remained reluctant to upgrade their PCs in the first year of the merged company, they still represent the lion’s share of the merged company’s PC business, and HP had to approach that market with a united front, DuBoise said.

The company was able to do this by eliminating the HP Vectra, and choosing instead to focus on the Compaq Evo.

"One thing they have done well is the clear decision to take certain product lines and do away with others," said Jonathan Eunice, principal analyst at research firm Illuminata Inc. in Nashua, New Hampshire.

Business users are also getting more mobile, and HP released several products to capitalize on that trend, including notebooks based on Intel’s Centrino technology and Tablet PCs.

HP will have to move its mix of products more toward notebooks as the market for PCs changes, said analyst Roger Kay of IDC. Notebooks offer higher margins than desktops, and shipments are expected to grow this year, as opposed to an uncertain forecast for desktops, he said.

The merged company was able to turn a profit in the personal systems group, earning $33 million in the first quarter of the company’s 2003 fiscal year, compared to a loss of $68 million for the combined company in the first quarter of last year.

HP’s focus on the dual-brand consumer strategy helped it to profitability in the fourth quarter, traditionally strong among holiday-buying consumers. But the jury is still out on whether the acquisition of Compaq’s PC business has helped the company overall. Critics of the merger were wary about increasing HP’s stake in a stagnant PC business, and business PC customers have still resisted the opportunity to upgrade their PCs despite low prices and new features.

The company’s flagship printer business remains largely unaffected by the acquisition. Dell entered the printer market this year, but HP is expected to maintain its market share due to strong brand loyalty, at least for a while, Kay said.

The impact on other business lines might appear if Dell is able to cut into HP’s profits from printers through a price war or market share gain, Kay said.

"If they have this big, highly profitable printer business, they can ease expectations on other businesses. If Dell printers reduce profit margins through competition, that reduces the contributions to businesses that need help," he said.

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