HP: Learning from Netflix

HP surprised the tech world yesterday, announcing that they would be keeping their PC business alive and well. After suggesting that they would be spinning off their hardware sales in response to tiny margins and an increasingly saturated market, CEO Meg Whitman reversed the decision on a conference call yesterday.

Many analysts believed that amputating the PC department was a good idea. Already occupying a decent portion of the server and enterprise services space, HP was poised to pull an IBM and convert to an entirely enterprise based model. The reasons given for the turnabout were pretty straightforward, and boil down the basic issue that HP simply couldn’t afford to pull it off. Financial analysts agree with this from a short term standpoint, but still believe that spinning off the PC unit will most likely have to happen at some other point in the future.

Aside from the basic financial aspects of the decision, HP could be learning a lesson from another company who decided to spin off a significant portion of their revenue and failed miserably doing so.

Reed Hastings, CEO of Netflix, faced a similar conundrum just a couple of months ago. Netflix was basically running two businesses: its DVD-by-mail service and its consistently strong, growing and multi-platform digital delivery service that resides on so many platforms that pretty much any household with any consumer electronic devices will have a gateway to Netflix; If you have a network connected TV, a game console, or a mobile device, you can get Netflix.

Obviously, the digital side of things was vastly outperforming the physical media unit, and Hastings thought the same thing HP thought originally. He already had this significant and growing presence in the digital world, and the shrinking margins of the DVD business, combined with decreasing DVD use overall, seemed like a great opportunity to change up the business and live up to its “Net”flix name.

The decision didn’t work out so great for Netflix. After rebranding the DVD business and calling it Qwikster (that’s two spelling mistakes in one brand name!), consumers were furious. After a controversial price hike that nearly doubled prices across the board, splitting the company in two was a sign of instability and unrest that consumers just weren’t ready for.  

The market wasn’t ready for it either. The company’s stock went into a free fall, and after this week’s announcement that they are still hemorrhaging customers in six figure numbers, analysts expect a total loss of 72% of the stock’s value in just the past three months.

After such a dismal performance from Netflix, HP’s Whitman could have seen some striking similarities to her own predicament. Representing some 30% of revenue, the PC business is still an important part of HP’s corporate image and culture, and although it’s in a rough business, full of shrinking margins, price wars, and retail stagnation, sometimes amputation isn’t the only cure. With such a well-known and integrated aspect of your business, you have to be careful with perception. After ex-CEO Leo Apothaker left with a bang, discontinuing HP’s first tablet entry and stopping WebOS in its critically acclaimed tracks, a move to spin off a whole third of your revenue doesn’t look so good. In fact, it looks a whole lot like Qwikster.

While spinning off the PC unit is probably a good idea from a pure business and long-term vision perspective, Whitman is making a smart decision to back off and wait for some more stability and cash flow before surgically removing a limb.

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Time to buy Netflix Stock. There is no Streaming Video competitor in sight for Netflix yet and they clearly have an early mover advantage. Everyone wants an iPad and once they get an iPad, they need video content. iTunes Store for Video content would be too limited and uneconomical and a Netflix app is the best available option.

neufuse said,
it was a stupid idea to spin it off to start with, HP has this weird habbit of picking idiot CEO's

It was *not* Whitman's idea, nor did it originate with any of the CEOs ahead of her (Apoleker, Hurd, or even Carly Fiorina). The idea of getting out of the PC business actually came from that group of renegades originally opposed to Carly becoming CEO (including David Packard), because they had doubts that the turnaround of HP's PC business (led originally by Fiorina, and later, Mark Hurd) would even work (primarily due to those razor-thin margins), and they cited IBM as the example.

They are all eating Dagwood-sized crow sandwiches, washed down with cold mugs of pride, because - surprise! - guess who rules the PC roost today? (It's not Dell, or even Acer.) The Fiorina/Hurd strategy worked - meaning that HP did what IBM could not. The markets basically told Netflix - and HP - don't fix what isn't broke.

Gotenks98 said,
This is completely different than what nextfilx is doing. Netflix got greedy and paid for it.

Actually no. The networks got greedy, made netfix play more for content, and as result had to charge more.

The reason for the Netflix fiasco was because the streaming and DVD service were bundled into one monthly fee and later they decided to try to charge double by charging separately for each business. This isnt the case with HP spin off. You wont be paying more for HP computer if HP decides to form a separate company to deal with PC sales or even if it sells it off to someone else (like IBM did with their thinkpad line up). The comparison to Netflix doesnt make sense at all.

The more plausible reason would be because HP probably with it new CEO has a new direction in mind and after the WebOS learned its lesson that they want to apply here. Also, HP PC division is relatively big that no other PC maker would be able to purchase if HP decides to sell it or at least wont get the right price for it.