Business Forum: TV's are Commodities - Are Computers Too?

By Isaac Cheifetz
Published January 14, 2002

The soap opera of the proposed merger of Hewlett Packard and Compaq continues. HP has mounted a massive publicity campaign selling the goal of the merger -- to become a computing services giant such as IBM. 

But the heirs of HP co-founder William Hewlett are strongly against the deal, envisioning the massive layoffs that will follow and dubious as to the odds of their stock going up in value rather than down.

The market continues to reflect pessimism about the deal. After it was announced Sept. 4, HP's stock traded below its pre-announcement price until early November -- when HP family dissidents went public with their criticism. In other words, HP shares rose when it looked like the deal was in trouble.

Most analysts are not enthusiastic about the prospects of two troubled computer manufacturers combining to create one successful manufacturer either in the PC market (neither can compete with Dell's low-cost model) or in the corporate systems integration market (neither has the high-end corporate consulting expertise of an IBM or Accenture).

The bottom line is shocking -- there are no viable computer hardware companies left, as computer hardware is now a commodity. 

This doesn't imply that companies will stop making computers, but the companies that will be able to make them profitably will be supply-chain innovators such as Dell or consumer electronics manufacturers such as Sony. Storage manufacturers such as EMC may continue to prosper, but these trends eventually will affect them as well.

Repeating TV's History

This has happened before. Consider the history of the television. From 1950 to 1970, TV manufacturing was dominated by companies such as Zenith, RCA and Motorola, which specialized in building TVs and radios. Between 1965 and 1985, these firms were overwhelmed by consumer electronics manufacturers such as Panasonic and Sony. 

TVs became plastic boxes with chips inside, manufactured using sophisticated process optimization and distributed by world-class marketing brands. The once-dominant firms moved on to other technologies (Motorola in wireless) or withered as manufacturers (Zenith and RCA).

Sound Familiar?

Similarly, during the past 15 years, computer hardware has imploded as an independent, profitable industry, one segment at a time. The mainframe manufacturers went first, followed by mini-computers, supercomputers, PCs and workstations.

Each was devastated by its products becoming commodities, plastic shells with advanced chips and software from other companies inside. Analyzing the several computer companies who are doing well actually enforces this trend:

• Dell is not a PC manufacturer so much as the Federal Express of the computer world, building computers using lean manufacturing techniques and delivering them on a just-in-time basis.

• IBM has become the ultimate systems integrator in a Web-centric economy, with the infrastructure to support large-scale computing and a deeply ingrained culture of making corporate management information systems work. 

But IBM outsources the manufacturing of PCs and has been driving the adaptation of Linux, the open-source (free) operating system, as a means of emphasizing its expertise in systems integration.

Sun Microsystems could be next to fall. The past several years, every Unix workstation vendor besides Sun has lost money. Sun was insulated from this trend for a long time by its software innovation in open-systems Unix computing and Java. 

But free Linux makes even operating systems a commodity, and as it becomes the standard corporate operating system -- and everyone but Sun and Microsoft would like it to -- Sun's value proposition and profit margins will erode.

Can HP be Saved?

Is there any plausible scenario under which the proposed HP-Compaq merger can achieve the success of IBM in evolving beyond a hardware vendor? Compaq has tried this before, unsuccessfully.

In an attempt to escape eroding PC margins, Compaq bought Tandem Computer (and its high-performance computing expertise) in 1997, and DEC (and its research and systems-integration expertise) in 1998. 

That new entity did not create the desired synergy of a global computer company, and it's unlikely this proposed one will, either. It is notable that no one talks much about what Compaq can do to thrive; merging with HP is its best hope.

A more promising strategy proposed by some analysts (such as Andy Neff at Bear Stearns) is for HP to become a printing/imaging company. HP printers and imaging products account for 40 percent of its revenue and the majority of its profitability. Pursuing this would entail selling its PC and services businesses, and reducing its corporate computing business.

Like a couple having a child in an attempt to save a troubled marriage, the merger of two ailing business models is unlikely to produce an entity that can transcend their market challenges. If they can't achieve synergy separately, how will they together?