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Is the PC dead? Dell, HP results suggest trouble

Carmi Levy

You'd be forgiven for looking at the latest financial numbers from industry leaders Hewlett-Packard and Dell and assuming the PC market as we know it is doomed.

The latest quarterly results from both leading hardware vendors paint a gloomy picture of fast-shrinking year-over-year and quarter-over-quarter revenues and profits thanks to tepid demand for their largely PC-based offerings.

HP's earnings of $1.6 billion on net revenue of $30.7 billion were down 31 per cent and 3 per cent, respectively, from the year-ago quarter. Device shipments were off 1 per cent and consumer demand for printers and PCs sapped revenue in that division by 15 per cent. HP isn't alone: Dell's numbers closely echoed those of its larger rival, with a 33 per cent drop in profit and 4 per cent in revenue.

HP's response: It's cutting its workforce by 27,000 workers — or 8 per cent — by 2014 and refocusing its efforts on emerging markets like China, and on investments in cloud computing, security, and information optimization.

A market in (dangerous) transition

The situation for both vendors likely won't improve anytime soon. Despite aggressive product refreshes — HP alone introduced 80 new models earlier this month at the company's Global Influencer Summit in Shanghai, China — and a rapid shift to thin-and-light ultrabook-based designs, most consumers and businesses have no compelling reason to upgrade before the new Windows 8 operating system from Microsoft bows later this year.

While the shift to a new operating system typically drives increased demand across the industry, the flipside sees a lull as buyers wait for hardware based on the new platform to arrive. Expect a few more quarters of tepid results before anything changes.

Still, HP isn't leaving its core business — its newly combined Printing and Personal Systems Group accounts for about half of the company's revenue. CEO Meg Whitman made it abundantly clear to analysts and journalists at the Shanghai event that hardware, not software, will define HP's future:

"First and foremost we're a hardware company... there is no company better in the world at designing and engineering products and bringing them to market," she said, adding "HP is not a software company. Therefore, we won't copy our competitors' business models. I'm so proud that ours is a company based on hardware, and HP will keep investing in hardware."

Her remarks were designed to quell any lingering doubts that the company was going to get out of the computer business entirely. Last July, then-CEO Leo Apotheker threw HP's future into question when, after abruptly dumping the company's Palm-based webOS tablets and operating systems, said the PC division could be sold off. Following Apotheker's abrupt departure, Whitman's first priority on taking over the reins in September was to answer the PC question once and for all.

"The first decision I had to make was whether or not to spin off our PC business," she said. "Within 30 days we had analysis that proved the PC is an essential part of Hewlett Packard. Quite quickly we decided to keep our PC business and invest in it."

That investment may not be enough in a stagnating market. IDC estimates the global PC market grew 2.3 per cent from Q1 2011 to Q1 2012. This compares to NPD data showing 124 per cent growth in tablet shipments in the same period. Whitman said HP intends to get back into the tablet market it abruptly abandoned last year, but only after Windows 8 ships.

Playing the productivity card

Despite the tendency in this iPad and smartphone-mad era to declare the humble PC dead, there's no mass movement to permanently abandon desktops and laptops. As fashionable as it may be to carry a tablet into a meeting, it's still no replacement for the do-everything computer with a full-sized keyboard and screen, fully-capable operating system and full suite of productivity software.

That advantage will assure ongoing demand — and some vendors are capitalizing better than others. Lenovo is expected to surpass HP later this year as the world's top PC vendor. The Chinese-owned company, which bought IBM's PC business in 2004, saw its net profit skyrocket by 59 per cent this quarter as it aggressively pushed for market share growth. Unlike its stateside rivals, Lenovo has an expanding portfolio of offerings in the fast-growing tablet and smartphone markets.

This one bright spot aside, the bottom line for the broader industry is stark: The personal computer just had a bad week, and an already beleaguered sector can expect more to come in the months ahead. But as an admittedly mature North American market awaits an expected bump from Windows 8 sales and emerging markets continue to register double-digit growth, hardware vendors won't back away from a market that's defined them for over a generation. Old habits die hard, and no one is ready to give up on the seemingly unfashionable but still indispensable PC just yet. They may die trying.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own.