HP job cuts could lead to PC product cuts

With Hewlett-Packard (HP) on notice to cut costs and eliminate redundancies, the company's PC group might be finally forced to confront a bloated PC lineup that can cause confusion among retail buyers and excessive product development costs, analysts said Wednesday.

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HP's PC division has been the subject of much discussion since the beginning of the year, when then-Chief Executive Officer (CEO) Carly Fiorina combined the group with HP's printer division. Several financial analysts, led by Merrill Lynch & Co. Inc.'s Steven Milunovich, have called for HP to spin out either the PC or printer group in hopes of improving the overall profitability of the company.

CEO Mark Hurd has downplayed speculation about a possible breakup of the company. However, it is clear that HP is closely examining its business units for inefficiencies, and its PC branding strategy will fall under that microscope, Hurd said in an interview Tuesday following the announcement of 14,500 job cuts across the organization.

"It's stuff we'll have to go look at and understand what we have with two brands," Hurd said. He declined to elaborate on what HP currently thinks about the 2002 decision to maintain two separate consumer PC brands, HP Pavilion and Compaq Presario, but said that new PC leader Todd Bradley is looking into the situation in his early days with the company.

After it acquired Compaq, HP killed its own Vectra PC line for commercial customers and chose to present a unified brand to IT departments. But it maintains two separate consumer brands, which on one hand helps HP dominate the store shelves in retail stores at the expense of rivals like Gateway Inc. and Sony Corp., said Roger Kay, president of Endpoint Technologies Associates Inc. in Wayland, Massachusetts. This retail presence also helps drive sales of HP-branded PC peripherals like printers, personal digital assistants and digital cameras, he said.

However, PCs in the two categories overlap in several areas and can be similar in terms of features and price, said Sam Bhavnani, senior analyst with Current Analysis Inc. in San Diego.

HP heavily advertises its HP Pavilion brands, but displays lesser-known Compaq PCs next to the Pavilion PCs at U.S. retailers such as Best Buy Co. Inc. and Circuit City Stores Inc., Bhavnani said. Those Compaq PCs do not mention HP on the boxes or the specification cards placed next to the PCs, and consumers might not realize that the same company makes both brands, he said.

On HP's Web site, there are nine separate desktop PC products, including both the Pavilion and Presario categories and 14 different notebooks in both categories. Those systems are offered direct to buyers, while retail customers see pretty much the same lineup in stores like Best Buy with slightly different model numbers, an HP spokeswoman said.

"Do you really need 14 different consumer notebook lines?" Bhavnani said.

By contrast, Dell Inc. lists eight different Dimension desktops and seven different Inspiron notebooks on its Web site. All of those systems can be configured by the customer, with some fixed configurations available.

"It comes right down to how many products do you want to support? Product lines have to continually introduce new product versions and there's all kinds of overhead associated with each brand," Kay said.

HP has a few options for its PC line. It can kill the Presario line of consumer PCs, which has lost much of its brand equity since HP cut back on advertising the brand following the Compaq acquisition, Bhavnani said.

"Compaq was bought in 2002. That was three years ago, and that's a long time in the tech industry. Compaq is an antiquated brand for the consumer," Bhavnani said.

HP could keep the Presario brand, but do a better job of differentiating the Pavilion PCs and the Presario PCs, Kay said. Gateway Inc. has done a good job of drawing a clear line between Gateway-branded PCs and eMachines-branded PCs following its acquisition of eMachines, Kay said.

"HP had never been clear about the definition. It slid Compaq down the price points a little bit, but the differentiation is not crisp," Kay said.

Hurd and Bradley will spend the rest of the year trying to figure out how to generate more substantial profits from the PC business, something that has proven elusive for HP and many companies in this industry. HP's PC and printer groups take in about the same amount of revenue, but in the company's second quarter the printer group produced a US$912 million profit, while the PC group recorded a $147 million profit.

One way to do that might be to bite the bullet, cede some retail shelf space to other PC companies, and move forward with a more streamlined PC product lineup, Kay said.

"Hurd has is absolutely correct when he said simplicity affects costs and performance. You take the redundancy out, and things get easier to do. I think he's on to something there," Kay said.