HP’s Fiorina Sees Innovation as Key
Joining a scramble to transform entertainment technology in the living room, Hewlett-Packard Co. Chief Executive Carly Fiorina is pushing into the consumer electronics business with new products that store, play and distribute digital music, pictures and movies.
On Friday at the International Consumer Electronics Show in Las Vegas, Fiorina unveiled updated Digital Entertainment Centers, or personal computers that receive and record high-definition television broadcasts. She also introduced a “Digital Media Hub,” which stores and plays back photos, music, video and high-definition TV shows.
HP’s efforts mirror those of other information technology companies as the traditional lines between personal computers and personal electronics blur.
Fiorina spoke to The Times this week about her digital entertainment strategy.
Question: Why are you pushing so aggressively into consumer electronics and digital entertainment?
Answer: We’re in this market because we’re already such a big consumer player, because it is a big market that we think is at its beginnings in many ways. But we’re also in this market because we think it’s different from classic consumer electronics, which really tethered specific kinds of content to specific kinds of devices.
We think it’s different from the information technology space in some fundamental ways, including a very high requirement for interoperability and simplicity. And we think we bring some unique things to that table. The fact that we have the combination of capabilities that we do makes a difference in what we can put into the marketplace for consumers, and we think our scope and scale gives us the ability to put this kind of technology into the marketplace at price points that really will drive mass-market adoption.
Q: Why introduce a new Digital Entertainment Center now, when you just started selling the first iteration last fall? Consumers haven’t yet shown that they’ve warmed up to the idea of a high-end “living room PC.”
A: That is what technology is all about: You put an innovation into the marketplace and you introduce subsequent generations, and with each generation you’ve learned something that you can incorporate for consumers.
I think it’s also fair to say that the digital entertainment space, while it’s very exciting, is really a fairly new space. I think we’re probably in the top of the third inning, not the bottom of the eighth here. There’s a lot of innovation yet to occur. Part of that innovation is going to go on in the home, in terms of the technology and the services that consumers use. Part of that innovation is going to go on in the process of content creation and content distribution, which is why we have important relationships in those spaces as well.
Q: How much are you spending on research and development for these types of products?
A: It’s in the billion-plus. Today we’re an $80-billion company. Of that, about a quarter is in the consumer space. Our [research and development] budget is about $4 billion, we’re generating about 11 patents a day, and our R&D; is disproportionately focused on the new areas and the new spaces and the new technologies, as opposed to maintenance of the old.
Q: Some investors and analysts praise HP for its R&D; spending; others criticize it for taking away from the bottom line. Dell Inc. spends much less on R&D; but has better gross margins, net margins and profit than HP. Do you worry at all that R&D; cuts into your earnings?
A: First, we are a technology company. If you are a technology company, you must innovate. Dell is not a technology company. They’re a very fine company, but they distribute the innovation of others. So in many senses, we have different business models and we are different businesses, although we happen to both be PC companies as described by the media.
Our current gross margins and our current net margins are more a function of not yet having achieved target profitability in certain parts of the business, because there are many other parts of our business where we are achieving more than [target] profitability, and in many cases like imaging and printing, those are where innovation is most intensive. So if you looked at our imaging and printing business, which earns world-class net margins, you could make the case that innovation absolutely pays.
The PC business happens to be a business where mostly, traditionally, it has been the innovation of Microsoft Corp. and Intel Corp., and that is the innovation that Dell distributes very well. Digital entertainment is going to require more than Microsoft and Intel. You can’t deliver simplicity and ease of use and a consumer-centric experience just with that, and that’s why you don’t see Dell making a lot of big innovative announcements in digital entertainment.
Q: We’re seeing other PC companies like Apple Computer Inc. and Gateway Inc. moving into that realm. They see their computers at the center of consumers’ digital universe. Are you concerned about having to compete with them in addition to the traditional consumer electronics players?
A: Apple believes the computer should be at the center of the experience. We actually don’t believe that. We’re focused on a consumer-centric experience, not a technology-centric experience. If we believed that the computer had to be the center of every experience, we wouldn’t be introducing a Media Hub. We’re introducing a Media Hub, in addition to a Digital Entertainment Center, because we think the consumer should be at the center of the experience, and they ought to have technology that fits their experience and their desired experience. Will the Media Hub interact with the Digital Entertainment Center? Yes. Will it interact with a PC? Yes. But the PC is not the center of the experience.
Likewise, we are different from Apple in another very fundamental way, which is that Apple has always connected content to devices. And traditionally they have also connected an operating system to a device to content. It’s a vertically integrated model; that is not our model. Fundamentally what we’re focused on is interoperability, heterogeneity and any kind of content that can be accessed and managed off of any kind of device.
Q: How difficult will it be to compete with the traditional consumer electronics companies such as Royal Philips Electronics or Pioneer Corp.?
A: They’re competitors at some levels; they’re partners at others. We’re announcing partnerships with both Matsushita Electric Industrial Co.’s Panasonic and Philips to drive both interoperability and standards, which is a key part to a simple, consumer-centric experience.
But I also think consumer electronics players bring to the table knowledge of the consumer market, but what they don’t bring to the table is software expertise, networking expertise. They really don’t bring to the table the knowledge of how to make this stuff work together. So they have some strengths; they have some weaknesses. But this is going to be a very competitive space.
Technology companies like ours are used to being in intensely competitive spaces; it’s what we do. There is not a space we would enter, or a space we would defend, that isn’t competitive. The question is, what are the assets you bring to the table, and we think we bring some that are pretty important.
