Merger Could Chain HP to the Past
In Hewlett-Packard Co.’s epic battle to acquire Compaq Computer Corp., winning could mean losing.
HP plus Compaq would create the world’s biggest personal computer maker, adding inherent efficiencies of scale as well as critical mass to become a leader in technology services.
But even the largest technology merger in history may offer little cover from the inexorable cycle of change that is pushing the PC to the sidelines, technology historians say.
If the merger proceeds, as HP declared it will Tuesday, it may relegate the storied company’s greatest glories to the past. As the largest PC company, it would tie itself firmly to a fading market, analysts say. They discount HP’s arguments that the combined companies could become the industry leader in server computers that manage networks and in lucrative technology services.
“The game has changed fundamentally for all the players in the PC business,” said David Yoffie, a professor at the Harvard Business School. PCs have become generic and interchangeable. Profits lie in efficiency--and by slashing prices in a furious race to the bottom.
HP, whose founders created the original Silicon Valley start-up in a Palo Alto garage in 1939, has thrived in a fast-changing industry for decades. Yet victory in the hard-fought merger battle could turn the technology giant into a victim of the latest wave of “creative destruction” that has shaped and reshaped commercial technology development for decades.
That term, coined by economist Joseph Schumpeter in the early 1900s, describes the inevitable changes forged by new technologies as they replace mature products as drivers of innovation and profits.
Like cars, steel, TVs, calculators and household appliances, HP’s most important products--PCs, printers and relatively inexpensive server computers that operate networks--are reaching the “oligarchic” stage of development, said Raymond Miles, former dean of the Haas School of Business at UC Berkeley.
He was referring to downward pricing pressure that has squeezed out many PC makers, leaving a handful of behemoths selling look-alike products. The recent recession shrank shipments of PCs last year, the first such decline since the mid-1980s, leading to massive overcapacity in manufacturing. According to market analysis firm International Data Corp., PC revenues will shrink 8% in 2002.
Those factors suggest to experts that HP’s future, with or without Compaq, must radically change direction.
“Within a mature industry, there’s room for the most innovative firm, the most cost-efficient firm, the most adaptive firm,” Miles said. But even those leaders may enjoy few big commercial breakthroughs.
The only sure winners may be Dell Computer Corp., the master of efficiency, and IBM Corp., the best at making PCs a loss leader to “up-sell” services and expensive hardware to large companies.
Navigating Major Technology Transitions
The decline of the PC industry follows a long-standing pattern. Each new generation of technology destroys complacent firms and replaces them with dynamic upstarts or deft innovators--much as a forest fire clears the way for new growth.
In the 1940s and 1950s, defense electronics needs dominated high tech as the nation pressed to win World War II, the Korean War and the space race. HP got its start with a low-cost audio oscillator that quickly positioned it for the needs of the era.
In the 1960s and 1970s, integrated circuits took over the focus of commercial development. Memory chips, a low-cost but essential component of computers, and microprocessors, the central brain of computers, vaulted Intel Corp. to the stature of an industrial giant.
From the 1970s through the 1980s, consumer electronics, from calculators to videocassette recorders, brought microcircuits to the mass market. Silicon chips also led to low-cost PCs--launching Compaq, Dell and Microsoft Corp. as central players in a period of hyper-growth that lasted through the 1990s.
By the mid-1990s, networked computing and the Internet succeeded the PC as the focus of innovation and commercial success--leading to the Internet boom of the late 1990s.
HP navigated these major transitions better than many others. But in the process it became increasingly PC-centric, and it now faces a critical choice: to ride the next wave of change or to be swept away as the industry remakes itself.
HP hopes that Compaq would add variety and strength to its product line. For example, Compaq’s popular iPaq hand-held computer, equipped with wireless connections to the Internet, has emerged as the strongest competitor to the Palm hand-held device.
Great companies outdistance rivals by making big bets on the future--positioning massive resources around the next big trends. And analysts seem to agree on a few key growth areas:
* Mobile communications and computing already are building a huge market--populated by products such as iPaq and the increasingly popular wireless e-mail pagers. Hundreds of start-ups are vying to find the winning formula.
* In the post-Sept. 11 environment, high-tech security has soared. Data-mining software to track terrorists, bomb-sniffing machines and screening devices and identification cards that use fingerprints, face recognition or even snippets of DNA to verify identity are garnering huge investments.
* The convergence of biotechnology and high tech--already a multibillion-dollar industry--could become a major commercial force within a few years. It’s no accident that IBM is building “Blue Gene,” a supercomputer 15 times faster than today’s most powerful models, to research the human genome.
* The commercial development of nanotechnology--the science of creating microscopic machines and materials atom by atom--may lead to computer chips that are vastly more powerful yet thousands of times smaller and less expensive than today’s models. Some scientists see the nanotech transition beginning within a decade.
No one knows what companies or approaches will prevail in those technology trends or others that may prove even more important. But in nearly all past transitions, companies willing to embrace drastic change, despite the cost, often have prevailed.
In the 1980s, Intel saw more efficient Japanese manufacturers quickly capturing its market for memory chips--the source of most of Intel’s revenue. The company jettisoned the memory market and threw its engineers into an emerging product, microprocessors. The move created the world’s dominant chip maker.
Microsoft finessed the decline of the PC market, its principal franchise, by reorienting its entire product line around the Internet. Like Intel, the software giant transformed itself internally, rather than merging with other companies to change course.
“In 1995 Microsoft was nowhere in network-based computing. Yet it made an extraordinary transition to the Internet and today is making a strong move in network-based services,” said Harvard’s Yoffie.
Looking Ahead,
Not Back, to Succeed
Less than a decade ago, Sun Microsystems Inc. was merely a builder of powerful workstation computers for engineers. As far cheaper PCs began to narrow the performance gap with Sun’s products, the company created Java--now an essential software programming language for online commerce. As a result, hundreds of corporations have gravitated to Sun’s hardware, said Daniel Kunstler, an analyst with J.P. Morgan Chase & Co.
With or without Compaq, HP has qualities and resources that could lead to similarly bold moves. The company spends lavishly on research and development. Its engineering culture encourages innovation.
HP has pushed rapidly to build mobility features into its core products. The company conducts groundbreaking research on nanotechnology and molecular-scale microprocessors.
And HP is not always risk-averse. In the 1990s, as less costly, standardized microprocessors became a market imperative, the company gave up much of its proprietary chip development and joined forces with Intel to work on the next generation of processors.
But with or without Compaq, HP may be forced to place bigger bets if it is to remain a key technology player. Gamblers don’t always win, but looking to the past as a survival strategy--as some view the HP-Compaq merger--usually means failure, experts say.
“All companies are faced with the same dilemma,” said Doug Henton, president of Collaborative Economics, which studies the Silicon Valley economy. “How do you consistently innovate?”
