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HP's Strategy: Connect "Device Islands"

Last August, Hewlett-Packard (HPQ) CEO Carly Fiorina unveiled an ambitious consumer-electronics strategy that left many industry observers scratching their heads. HP rolled out more than 100 new devices for the small-business and consumer markets, including printers and digital cameras as well as DVD recording systems to replace VCRs.

Such products just keep on coming: HP appears poised to jump into digital music players, a market now dominated by Dell (DELL), Creative (CREAF), Archos, and, most notably, Apple (AAPL). Also among HP's coming attractions are a digital music service and flat-panel TVs, one of the hottest consumer-electronics items this holiday season.

To get a handle on how HP plans to crack a tough market that has chewed up plenty of American, European, and Japanese companies, BusinessWeek Online Technology Editor Alex Salkever spoke to HP Vice-President Chris Morgan, who oversees worldwide sales and marketing of consumer devices. Here are edited excerpts of their conversation:

Q: What attracts you to the consumer-electronics market? It's a brutal business.

A: If you look at what HP is already strong in -- computing, connectivity, digital-image processing -- we think those are going to be extremely important for the future of consumer electronics. We think consumers are going to want their products to be interoperable. That plays to our advantage. Not only are we the No. 1 consumer computer company in the world, we think that our understanding of big-business ecosystems will be a powerful advantage in helping us develop these solutions. No other big technology company has a position like ours.

Q: There are some areas where you haven't gone, such as home audio. Why have you chosen to focus on photography, music, and DVDs, among others?

A: Digital photography is a natural extension given our strength in computing and image processing. As computing platforms move into the entertainment space, products like the HP DVD Movie Writer [designed to help users transfer home video from tape to DVD, with the help of a PC] will start to become another focus. We're helping consumers preserve their memories.

In digital entertainment, we build media PCs that will help people move digital images, music, and videos from their home office into their living room. Those are areas where we think we can add value.

Q: What's your vision of digital entertainment?

A: Ultimately, consumers will want to move content around and not be constrained by device islands. The PC world, the music world, the photography world, all were separate. Increasingly, consumers are going to want to integrate them. They'll want to move content from camera to computer to e-mail or DVD, from camcorder to computer to TV, or just skip the computer and go directly from device to playback system.

Q: How far along are we toward merging those device islands?

A: There's a lot of work to be done. Digital photography is a great example of how we can move from stand-alone devices to a system where consumers get interoperability among devices. Now we have to go beyond digital photography to other entertainment -- music or video or any combination of digital media.

Q: In digital photography this is easy because most of the content isn't copyright-protected. But this concept of merging device islands can get sticky where the content is copyrighted, as in music or movies. How can you strike a balance? This issue touches on an increasing number of areas you're trying to break into -- your music player and DVD recorders, for example.

A: We are sensitive to the trade-offs. We spend a lot of time working with content providers to make sure we balance their interests with consumer needs. With products like the music center PC, we're following industry standards. We aren't taking any unique digital-rights approaches at this time.

Q: To put it bluntly, how can HP avoid becoming a Sony (SNE)? It makes great products but has a lot of trouble making money in consumer electronics.

A: The vast majority of Sony's profits come from games and movies. We don't think that will happen to us, and it goes back to looking at what HP is strong in. We're strong in innovation. As long as the consumer values innovation, we think that putting our innovation out there is the right strategy for the market.

Our innovations in printing and photography are proving that. We've gotten a huge response to the adaptive-lighting feature in our model 945 digital camera -- it automatically adapts lighting to make pictures look less black and white, and more nuanced.

I think the same is going to be true in the rest of the entertainment space. We will have to innovate to bring to market-differentiated solutions. If you look at the breadth and depth of HP relative to its digital computing and consumer-electronics base, we're extremely well positioned to innovate, not just in devices but in systems.

Q: How does the shift to digital change the attitude of people who buy consumer electronics?

A: They're no longer going to look just at the box. They're gong to look at how the box integrates into their world.

When we came out in August with our consumer strategy, we started from the proposition that electronic products today are still too complicated. The burden is on customers to be a system integrator and an expert. And they don't want to deal with that.

So a lot of the things we're working on revolve around simplifying the experience. The one-button proof sheet we have put on our all- in-one [printer/scanner/fax] digital-imaging devices -- that was an example of an important contribution to the market. The ability to push a button and print out a proof sheet of [photo] thumbnails without having to use any software, then pick the pictures you want, size, and print them -- that's huge. That's what we think we can bring to bear.

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