What "Change" Really Means For HP
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the word "change" has swept the nation in the last several years amidst these tough economic times, it seems like everyone is making promises for positive transitions: President Obama coined the word in his first campaign a few years ago, and executives across the country are pledging to turn around their respective companies. Marissa Mayer promised to bring change to Yahoo! when she joined the company this past July. Now, Meg Whitman has committed to restructure many aspects of HP (NYSE: HPQ) from the ground up.
A few weeks ago, I wrote about an HP conference in which Ms. Whitman stood in front of shareholders and did something that CEO's rarely do: she told the truth--the ugly truth. She admitted that HP had "much more work to do" to get on track for where they wanted to be in 2016. The talk she gave shot HP's stock down that morning, as HP's shareholders ran for the exists, marred by figures that Whitman told them to expect for this fiscal period.
But, as I said, she promised change. At the time, it wasn't extremely clear what that change meant. A few readers even commented that they wanted to know exactly what it was that Whitman was being so broad about. Well, many of the details have surfaced as to how Whitman plans to "change" HP to become the company that they would like it to be by 2016.
Ms. Whitman has said that she plans on focusing in the areas of product development and global marketing. One of the problems that HP has encountered over the past few years in product consolidation--or, really, the lack thereof. This proved especially harmful after the acquisition of companies like Lefthand, 3com, and others, as Whitman noted. HP has been forced to make thousands of layoffs, too, meaning that fewer people have been challenged to make more products. As a result, the quality of products declined, and Whitman knew it. To fix this, Whitman plans on decreasing the number of products that HP currently produces. The company mde 2,100 varities of laser printer. Think about that number for a moment. Parts, labor, and packaging costs for all of the varieties have sent costs through the roof, Whitman relinquished, and HP plans to drastically decrease the amount of printers that they produce.
Another big problem for HP is ink. Ironically, a few short years ago, that sentence would have started with "the biggest advantage for HP..." However, ink sales, once responsible (largely) for HP's success in recent years, have tanked. The "secret" that HP used was selling their printers at very cheap prices, and then charging a lot for their ink. This created a sort of subscription service for customers with HP printers. HP had enormous profit margins on their ink, and all was good. In fact, at one point, the cost of HP ink was almost twice the cost of human blood. This graph illustrates how expensive ink really was:
Now, with much less ink consumption worldwide, HP has run into a wall of sorts. People are using tablets and cell phones instead of printing things like boarding passes more often now than ever. Furthermore, people just don't print as much unnecessary stuff to save money in an economic downturn. As a result, HP's ink sales have fallen sharply. As a solution, Whitman has come up with something entirely new to the industry: a printing subscription system. When purchasing a printer, you would be purchasing with it a subscription to ink. Upon setting up the new printer, you will be required to establish an account with HP. Then, newer and smarter ink cartridges will monitor the rate at which you consume ink and, when ink levels get low, they will automatically order new cartridges using the account information you provided when setting up the printer so that when the printer runs out of ink, there will be some of the good stuff at your doorstep.
Whitman thinks that this will encourage more printing and higher ink profits for the time being. She also plans on increasing the prices of printers so that HP makes more of a profit on them. Currently, HP make very little profit on printer sales.
Analysts, for the most part, are split on the consensus of whether or not this subscription service will work. The argument against in is that it still doesn't encourage more printing in an increasingly ink- and paperless world. However, it should figure to rake in some cash while HP gets re-situated.
HP, in addition to laying off even more employees, also plans to shift their focus away from areas in decline and towards those that are thriving. For them, this means a much larger focus on cloud computing, and how they can make money on it. Part of this involves cloud printing and printer storage, an area still under develop by HP. However, with their new "ePrint" technology, anyone can print from anywhere to their own printer with the click of a mouse. You simply email what you want printed to an address specialized for your printer only. The printer, connected to the internet, receives the email and prints the content.
The Foolish Bottomline
For now, HP remains a sell in my book. Whitman has directly said that she thinks it will be several years before HP has fully righted the sinking ship. She is already the fourth CEO in the past several years to give it a try. We'll see how she can do. For the time being, we should all stand back--far back--and watch as they do their best with what they have. However, I wouldn't put my money on it just yet.
Michael Nolan has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!