HP minus iPod: Why it makes sense

For the past decade or so, HP has been too focused on deciding who to be like, rather than on finding its own way.
Peter Burrows

Financially speaking, Mark Hurd's decision for Hewlett-Packard to stop selling Apple Computer's iPod music player is very nearly a non-event. With just 5% of all iPod sales, revenues from the "Apple iPod from HP" have been a rounding error for HP since the deal commenced in early 2004.

But Hurd's move may be a major step forward in solving a big problem that isn't easily measured in dollars and cents: HP's identity crisis.

Here's what I mean. I'd argue that for the past decade or so, HP has been too focused on deciding who to be like, rather than on finding its own way. The problem started when the company began to outgrow the simple formula that had made it the world's most successful, and profitable, engineering company. That formula: put smart techies in a room, and leave them alone to design the kind of engineering gear they'd love to get for Christmas. Whenever one of them came up with a gizmo that got his colleagues' transistors buzzing, chances are the company had another hit on its hands.

But life got more complicated when sales of printers and PCs--aimed at businesses and even consumers, egads!--began to dwarf sales of products sold to engineers. No doubt, the company as a whole has proven hugely successful by tech standards; just consider the long list of former rivals that couldn't make the jump. But outside of the dominant printer group, which has always had a strong sense of self, HP never seemed quite comfortable in its new skin. In too many ways, it seemed more like a follower in search of someone to emulate.

Take computers. Back in 1995 or so, HP seemed to catch a bad case of Dell envy. Rather than use its R&D muscle to come up with stand-out innovations (or get out of low-margin businesses where it would be hard-pressed to compete), it set out to match Dell's hyper-efficiency in many of these businesses. For the most part, it came up just short enough of the target for it to hurt, leaving it in a sort of high-tech purgatory. For years now, HP has struggled to show consistent profits in its vast PC and high-end system businesses, but has also lacked the breakthrough products necessary to deliver stand-out performance.

To end that depressing outlook, Carly Fiorina swung HP's attention from Austin to Armonk , and to some extent Cupertino. After she was hired in 1999, she tried to fix the computing businesses by melding HP's vast portfolio of products into soup-to-nuts solutions that would solidify its position with corporate buyers and pad its profits--much as IBM does. Alas, HP remains for the most part what it was: a big boxmaker, that badly lags IBM in the services and software that ties those products together.

On the consumer side of the house, Fiorina seemed to take her cues from Apple. The message seemed to be that if HP could be as mighty as IBM, it could be as cool as Steve Jobs & Co., to boot. The iPod deal was the hallmark of this effort, but not the only element. For example, the company began pouring huge money into slick TV corporate image ads filled with hip urbanites, clearly aimed at the world's most-likely-to-own-an-iPod demographic. The ads were a far cry from, and a big improvement over, the hopelessly geeky efforts of HP past. But they haven't had much impact. In BusinessWeek's latest Global Brands Scorecard, HP brand equity fell 10%.

The moral of the story: that HP once again has to come up with its own unique strategy, one that reflects and builds on HP's culture and capabilities. Clearly, the iPod deal wasn't such a transaction. Fiorina okayed it despite her stated strategy of rekindling HP's status as an inventor of world-changing products; one Wall St. wag joked soon after the deal was announced that "the logo says Invent, not distribute." And there were other signs of trouble ahead. The deal got the go-ahead despite the objections of many HP managers who feared it would cloud HP's overall digital media strategy. After all, HP had long been pushing Microsoft's Media Center platform as the foundation for tomorrow's digital lifestyles--and Media Center products don't work with the iPod. No surprise, this is the explanation given now by HP to explain HP's departure from the iPod ecosystem.

Hopefully, Hurd's iPod decision will be reflected in the months ahead as he turns his attention from cost-cutting to strategy-setting. To really restore HP's luster, he'll have to ruthlessly prune its overgrown garden of projects and initiatives, and once again focus on those that can lead to creation of its own hit products--and I'm not talking about iPod tattoos. The resulting company might never be as efficient as Dell, as big as IBM or as cool as Apple. But if Hurd can pull it off, it just might be a new kind of HP--one that isn't forever being negatively compared to someone else.

Before it's here, it's on the Bloomberg Terminal.