Is It Any Wonder Hewlett-Packard Is Dying?

The IT giant boots its server customers to the curb with its new service policy.

Feb 12, 2014 at 2:00PM

Here's something you don't see every day. After several years of declining revenues and earnings due to internal strife, missteps, and a stubborn adherence to a dying PC industry, Hewlett-Packard (NYSE:HPQ) made an interesting decision a few days back: It kicked many of its server customers to the curb. Upsetting customers is rarely a good thing, even for the best of companies, but for HP it's absolutely mind-boggling.

In a blog that was surely expected to cause little more than a raised eyebrow or two, vice president of HP's server and support unit, Mary McCoy, authored a missive entitled, "Customers for life" a few days back. Sounds good, right? Unfortunately, all McCoy's note did was succeed in enraging many of its server customers and forced her to follow up with another ditty to "provide more context for the decision."

She said what?
In McCoy's original note, she begins by stating that "effective February 19, 2014, we will provide firmware updates through the HP Support Center only to customers with a valid warranty, Care Pack Service or support agreement." No service agreement? No support.

Lest HP customers get the wrong impression -- you know, that it's strong-arming customers to purchase a warranty or service agreement or fend for themselves -- McCoy added, "[W]e are in no way trying to force customers into purchasing extended coverage." Really?

You'd think that would be enough -- telling HP firmware customers that it would provide fixes and updates to those with a service contract -- but McCoy didn't stop there. In what would be laughable were it not for the fact that she wasn't kidding, McCoy said that HP's new policy of abandoning its customers was aligned with "industry best practices and is the right decision for our customers and partners."

One of the many comments from HP customers -- virtually all negative, of course -- pointed directly to the "industry best practices" statement, noting that others in the industry, namely one of HP's biggest competitors, and a company much further along in its transition away from hardware, IBM (NYSE:IBM), didn't follow this "best practice."

After further review
To her credit, McCoy followed up her initial "news" with some clarification about which customers are affected and how. Perhaps most important was that HP's new policy is for ProLiant server clients only. McCoy went on to explain that HP is only putting, "entitlement requirements" -- in other words, the need to pay for a service contract -- on ProLiant's ROM and "complex programming logic devices" firmware.

If you're of the mind that HP's decision to stick it to only a few of its customers makes its decision tolerable, McCoy cleared that up. In her "More information on HP firmware availability" blog, she reinforces what's obvious to anyone who read either message: If a ProLiant client wants service, they need to pay for it. McCoy explains the value of purchasing a service contract by saying, "It is through the sales of warranty in the product, and sales of support services after the warranty, that we are able to invest to create great customer experiences with our products." So, HP ProLiant warranty customers are providing it with the funds needed to invest in R&D?

Final Foolish thoughts
HP fans are quick to point out that in spite of declining revenues and a snail-like transition to the 21st century, its stock is up over 70% in the past year, and they're right. The question is, why? Because CEO Meg Whitman has trimmed thousands of jobs to help bring costs down to match the drop in sales? When HP stock jumped late last year after Whitman said its revenue declines should slow this year and -- hold your breath -- possibly increase by 2015, that said it all. Market sentiment, not fundamentals, is driving HP right now, and that's a recipe for disaster.

Ginny Rometty, CEO of IBM, was appointed to the top spot a little over a year ago, and already has Big Blue positioned as a leader in cloud technologies and big data, both burgeoning markets not reliant on hardware. Not to mention IBM and HP are trading at about the same multiples, and IBM pays a better dividend yield. As for Whitman, it's been about two and half years since she took over the reins at HP and all there is to show for her tenure are promises it will get better. Oh, and telling some of her customers that they're on their own.

Investment ideas for the long haul
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Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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