Hardware

Are sharks circling HP?

Competitors will try to use uncertainty to win customers from HP, analysts predict. It's not yet clear whether they will succeed.

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By John G. Spooner
Staff Writer, CNET News.com

While the departure of Hewlett-Packard CEO Carly Fiorina is unlikely to immediately alter the computer hardware market, it will be used as ammunition by Dell and others in an attempt to win HP customers, analysts say.

Although HP plans to continue selling its main products and will keep its PC business in-house at least for now, analysts say competitors ranging from Dell and IBM to specialists such as Sun Microsystems and lesser PC players such as Gateway will attempt to wrestle away its corporate accounts, as well as large government and education customers.

HP's changes "could present the opportunity for its competitors to have a good year," said Chad McDonald, senior manager for product planning at Gateway.

Bob Wayman, HP's CFO and interim CEO, said the company doesn't intend to alter its fundamental structure, suggesting that radical measures such as spinning off HP's PC business—a measure that, like IBM's plan to sell its PC business to Lenovo Group, would change the face of the PC market—won't come in the short term, while it searches for a new chief executive.

HP weathered the storm of uncertainty relatively well during its acquisition of Compaq Computer in May 2002. It maintained relationships it inherited with large companies such as Walt Disney. But it has been under tremendous pressure from the likes of Dell, whose shipments outgrew HP's during the fourth quarter—normally HP's strongest time of year—ranking Dell as the top PC maker.

Stirring up the pot
"It'd be easy for Dell to characterize HP as being in disarray, whether or not it's actually true," said Roger Kay, an analyst at IDC. "Any time there's a disturbance in a company, competitors can point to instability. They can stir up the pot, and they do."

For its part, "Dell continues to stir up the pot with IBM's customers—it'll use anything it can to pry away customers from competitors," Kay said.

IBM's plans to sell its PC business to Lenovo has been under scrutiny from the U.S. government. Between IBM's shifts and HP's leadership changes, analysts say some customers might perceive an increasingly tumultuous PC market and turn to Dell, which has been steadily growing.

Others could benefit as well. Gateway, which acquired eMachines last year and subsequently reorganized by trimming its work force and reforming its product lines, will also seek an edge. The company, which plans to make a push in selling business notebooks during 2005, continues to be strong in government and education, its executives say.

While HP will face new battles on the PC front, Sun Microsystems and IBM could move in on it with big iron as well.

HP and Compaq argued that one technology in particular would carry the combined company to greater heights: Intel's Itanium processor for high-end server computers. Both companies believed that Intel's Itanium would sweep the market for servers and become as widely used as x86 chips such as the Pentium—and that the new HP would lead the market.

But that Itanium ubiquity failed to materialize because of delays, unspectacular initial performance and difficulties adapting software to the processor.

And now HP's three server competitors have headed in the opposite direction. IBM now aggressively promotes its own Power processor family, Sun Microsystems is reinvigorating its Sparc line and embracing x86, and Dell continues its gains with the much more widely used Xeon processors from Intel.

While HP has consolidated many of its server lines on Itanium, it's had troubles, too. In December, it scrapped a plan to bring key elements of Compaq's version of Unix to the surviving HP-UX. And the company sells servers with Advanced Micro Devices' Opteron processor, which undermined one Itanium advantage by bringing 64-bit memory addressing to the x86 realm.

Still, analysts expressed some optimism for Hewlett-Packard on Tuesday.

HP "might be at the point where the company looks like it's going to take a new direction, and maybe it'll get its act together," said Chris Foster, an analyst at Technology Business Research. "For some of the customers that have hung around, that did business with the old HP, maybe there's some relief" that the company might return to its roots in engineering.

For customers, "I would definitely think there's optimism at this point," Foster said. "I don't think there's anyone terribly upset today."

Management changes are also unlikely to have a big impact on HP's consumer businesses.

"At this point, I don't think anything is going to translate down to the sales floor," said Steve Baker, an analyst at The NPD Group. "I don't think there's any uncertainty that there isn't going to be a line of PCs coming from (HP)."

For its part, HP did share some of its plans for the future. Wayman said during a conference call for press and analysts that the company intends to expand in those areas where it is strong, notably in imaging and printing. At the same time, it will seek to improve the profitability of its other businesses, including its server and storage business, and its professional-services consulting arm.

"In our PC business, we have made great progress in a number of arenas. Profitability has gone from a substantial loss position to a reasonable level of profitability," Wayman said. Meanwhile, "in our enterprise storage and server business, this is where we had significant disappointment last year, particularly in the third quarter. We fully acknowledged and described the execution problems. We have those particular problems behind us, but we now have to develop a steady and consistent track record."

CNET News.com's Stephen Shankland contributed to this report.

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