Hewlett-Packard: Smartphone Central?

Spiffier handhelds may supply the kick its bread-and-butter products can't provide

One of Hewlett-Packard Co.'s (HPQ ) new smartphones sports a feature that will be familiar to most music lovers: a raised navigation wheel where you slide your finger to control the device. Demonstrating the iPAQ 600 Business Navigator, Dave Rothschild, head of HP's handheld-products business, describes the wheel as "an iPod-like feature." It makes sense to include it, he notes, because with the success of Apple Inc.'s (AAPL ) music player, "it's a feature that people understand."

Not that Rothschild or other HP executives would say that they deliberately knocked off the look and feel of the iPod. But the control dial is one hint that the maker of bread-and-butter PCs and printers knows that in the world of handheld devices, design and features count as much as, if not more than, reliability and price. Until now, HP has only dabbled in smartphones, or devices that serve as both wireless phones and handheld PCs. But on Sept. 5 it launched two new smartphone models, the iPAQ 600 and 900, and several other handheld products under its iPAQ brand, including a navigational device and two personal organizers. In July, HP brought out the $320 iPAQ 500, which allows voice commands for up to 20 tasks. Prices for the other devices haven't been disclosed.

Smartphones may be unfamiliar territory for HP, but the company needs to make the journey. HP recently displaced Dell Inc. (DELL ) as the world's largest PC company, thanks in large part to Dell's own meltdown. Chief Executive Mark V. Hurd has boosted operating margins through aggressive cost-cutting, in areas ranging from retirement benefits to real estate.

But despite recent rosy quarterly results and an upbeat forecast, some analysts and investors wonder how long HP, based in Palo Alto, Calif., can continue to increase sales in light of its already massive volume of almost $100 billion a year. The company's most recent growth stemmed primarily from its revived core PC business, but Dell is on the mend, and Acer Inc. and Lenovo Group (LNVGY ) are building scale and efficiency. To reach its stated goal of 4% to 6% annual sales growth, HP needs to find new and broader markets.


Hurd has made significant progress in cracking some other markets, such as selling software to large companies. But so far, HP's forays into electronics outside PCs and printers have been slow going. The company has been promoting its TVs for years, for instance, but is only the ninth-largest seller of plasma TVs and doesn't rank among the top 10 in LCD sets, according to researcher NPD Group Inc.

So why expect more from phones? The market is growing fast; U.S. demand for smartphones is expected to increase by 64% this year, from 8.4 million units in 2006, says researcher International Data Corp. And HP is tapping a familiar customer base. Its smartphones target primarily companies and their mobile employees who work at home or on the road, so HP can try to sell its smartphones bundled with batches of PCs and printers.

Yet HP also plans to sell the phones through retailers and phone-carrier stores. So it's crucial to make them cool enough to stack up next to more consumer-oriented products. "Increasingly, we see the power of the consumer in determining what's acceptable as a corporate device," says Gartner Inc. (IT ) analyst Charles Smulders.


That trend could pose a problem for HP. Its newest smartphones, which are black with rounded corners, still look clunky next to Research In Motion Ltd.'s (RIMM ) BlackBerry Curve or an Apple iPhone. On the other hand, the screens on both HP smartphones are bigger than those on HP's past products and comparable to those on the new BlackBerry and iPhone. And that navigational wheel on the iPAQ 600 Business Navigator could be a big design plus; because that model has a numerical keypad and not a PC-style keyboard, people tend to use it with only one hand. The wheel, overlaid on the keypad, lets you do tasks like scanning through menus quickly using that same hand, says HP's Rothschild.

HP has been gearing up for its smartphones push for well over a year. In early 2006, the company separated its handheld-devices business from the notebook PC unit to give it "greater financial and operational control." Rothschild, who in the 1990s was a product manager for Apple's PowerBook Duo laptop, was brought in to lead the business. He says HP has boosted its investment, partly to staff up with former employees of RIM, Palm, Apple, and Samsung.

Success in smartphones may depend on how rapidly that group can teach HP some new tricks. Product cycles for the devices are shorter than for many PCs and printers. And designing a smartphone is more complicated. Creating a product both wireless and palm-sized is, Rothschild says, "an order of magnitude" more complex than designing laptops. As he notes: "Every bit of air, every millimeter of space matters."

By Louise Lee

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