HP vs Dell

WSJ writes how HP is willing to sell PCs at almost no margin:

“We think the PC business is strategic,” says Chief Executive Carly Fiorina. She says she is willing to allow the company’s $22 billion computer division to do little more than break even because PC sales help H-P make money on printers, consulting and consumer electronics. The company is content to sell PCs at “a very modest profit for now,” says H-P Chief Financial Officer Bob Wayman.

The result is the biggest threat yet to Dell, the PC industry’s most profitable company. Having acquired Compaq in 2002, H-P is using its size to slash prices, in an attempt to undercut Dell’s formula for gleaning profits in one of the nation’s most competitive markets. The challenge puts pressure on Dell’s earnings just as the tech industry is emerging from its prolonged slump and consumers are beginning to invest more in computers.

Still, for H-P, the strategy is a serious gamble. By cutting prices, the company earns less on each sale, leaving it with less of a cushion to absorb the inevitable shocks that roil competitive markets. H-P’s profit margins in its PC division haven’t exceeded 1% since the merger.

Dell continues to post solid profits; its operating profit margins of more than 8% are the widest in the industry. But its executives are complaining that H-P is subsidizing its PC business with earnings from other divisions, which to some suggests Dell is beginning to feel H-P’s heat.

There are only three companies that make big profits directly from PCs: Intel, Microsoft and Dell.

As I see it, the opportunity going ahead lies in providing software for a monthly subscription fee with thin clients available at costs-plus to drive consumption in the emerging markets.

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.