HP Takes Aim at the Smartphone Marketplace

As the market for desktop PCs continues to fade, Hewlett-Packard (NYSE: HPQ  ) has found itself in a tight spot. CEO Meg Whitman's Sept. 10 announcement that HP's expense-reduction plans -- including showing 27,000 employees the door -- would become even more aggressive was well received among investors. But as I discussed in the article posted shortly after the news, there's a problem.

HP also shared its plans regarding what departments would take the brunt of the cuts. The enterprise and services units, both underperforming and areas of concern for HP, will be hardest hit. Where does that leave HP? With a shrinking PC marketplace, scaling back the business units to compete in the explosive cloud and server space and, seemingly, without a tangible plan to become relevant again.

Got to hand it to Whitman
Unless you've been hiking in the outback, you've heard all about the craziness surrounding the unprecedented success of Apple's (Nasdaq: AAPL  ) iPhone 5 release. The latest and greatest gadget from Apple more than doubled pre-sales of last year's wildly successful iPhone 4S.

So when Whitman announced plans on Sept. 14 to enter the ultra-competitive smartphone market, the sound you heard was the collective groans of HP shareholders everywhere. Industry folk will recall that HP's been down the smartphone road before, with less than stellar results, after its 2010 purchase of Palm and its WebOS system.

As Nokia (NYSE: NOK  ) with its Lumia smartphone is also learning, it takes more than a good device with a new OS to make a dent in Apple's world. So what is HP thinking?

Turns out HP's foray into the smartphone market has little to do with Apple, Nokia, or any other retail smartphone player. No, the space Whitman plans on going after is an area once dominated by beaten-down Research In Motion (Nasdaq: RIMM  ) -- the enterprise market.

Addressing the challenges ahead
As with HP's recent news about plans to offer customers ultra-tablet computing options, the smartphone announcement didn't come with a ton of specifics. When can business customers plan on seeing the new phones? What operating system will HP employ? Though HP offered few concrete answers, there are some likely scenarios.

Whitman sort of addressed the issue of timing. Heeding the woes of Nokia and its efforts to rush the new Lumia smartphones to market -- with a glitch or two, as it turned out -- Whitman isn't in a rush. As the HP CEO stated, "My mantra to the team is 'Better right than faster.'" Ensuring things get done right is a sound strategy, but there are limits to the latitude HP followers will allow.

As for which OS a new HP smartphone will run on, here's some conjecture. On Sept. 5, HP issued a press release announcing plans to partner with Microsoft (Nasdaq: MSFT  ) to offer an array of cloud services to clients. Microsoft is no stranger to the enterprise space, and with the rollout of the Windows 8 OS, expanding on its partnership with HP would make sense.

HP's emphasis on business smartphone customers doesn't mean it won't run headlong into iPhone and Android OS competition, however. As more and more companies allow employees to sync their personal devices with company networks in the workplace, HP will have more than RIMM to concern itself with.

No hurry? Really?
Many believe, myself included, that HP has waited too long to reinvent itself from an old-school PC company. You don't have to be an industry insider to see there's little to no future in what is quickly becoming the IT industry's version of the hi-fi. Added to the problems HP faces by not reacting to a rapidly changing market is the disjointed collection of employees and departments.

How does a company become disjointed and slow to react to industry trends? Consider this: HP has spent more than $67 billion in acquisitions the past 10 years, more than twice its current market capitalization of $35.65 billion. The $8 billion charge HP will take next quarter to write down the 2008 $13.9 billion purchase of EDS is a glaring reminder of the many deals gone bad. All those companies bring different cultures, new employees, and systems. It's no wonder HP's left hand doesn't know what the right's doing.

I like the smartphone and tablet notions: HP has to do something to make itself relevant again, and the enterprise smartphone market could be it. And Whitman deserves some time; a year is hardly enough to right a meandering ship, and she seems more than capable. Not to mention that with $9.5 billion in cash and $127 billion in annual revenue, news of HP's imminent death is greatly exaggerated. But there are simply too many hurdles and uncertainties right now. A return to prominence for Hewlett-Packard is possible, but I wouldn't place any bets just yet.

On the other end of the spectrum is Microsoft. Once known for its goal of running the universe, Microsoft is now content to go after new, emerging markets. Windows 8 and a suite of cloud services are just two examples of Microsoft's efforts to remain cutting-edge. If you're thinking about adding Microsoft to your portfolio, or wonder whether you should, make sure to check out our premium report first. Just click here to get started.

Fool contributor Tim Brugger currently holds no securities positions mentioned in this article. The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft and Apple and creating a synthetic covered call position in Microsoft and a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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