News

HP Gains on Dell in Tough PC Market

• By The Associated Press
• 05/19/2006

Rival Dell Inc. had just snatched the top spot right back.

Although the companies' rankings flip-flopped in subsequent quarters, Dell eventually cemented its top market share. That bolstered critics who had encouraged HP to get out of the PC business and blasted the Compaq deal for increasing HP's exposure to that tough market.

What a difference a few years and a new CEO make.

Earlier this week, roughly four years after the Compaq deal closed, HP said that sales in its PC division grew 10 percent in the three months that ended April 30, while Dell said its revenue grew by 6 percent over roughly the same period.

And market researcher Gartner reported that HP's share of worldwide PC shipments grew to 14.9 percent from 13.8 percent in the same period last year. Some of the gain came at the expense of Dell, whose share slipped to 16.5 percent, from 16.9 percent last year.

"It's unbelievable," said Samir Bhavnani, director of research at Current Analysis. "Dell missed the fact that people like HP and others were getting their act together."

Over the past year, Dell has underestimated the success HP Chief Executive Mark Hurd has had in cutting costs, said Roger Kay, an analyst at Endpoint Technologies Associates.

Hurd was hired 14 months ago to replace the ousted Carly Fiorina, who had led the charge to take over Compaq. Walter Hewlett, a son of an HP founder and then-board member, claimed during the proxy battle the merger would "leave HP doomed to be a leader in nothing."

But rather than hobble HP, the PC business is now reliably profitable -- as are most of the sprawling company's divisions, which range from enterprise servers and software to printers, cameras and televisions. Dell, though still the No. 1 PC maker, has seen its profits decline.

HP shares have gained 47 percent since Hurd's appointment in late March 2005, while Dell's stock has lost 36 percent of its value. HP shares fell 46 cents on Friday to close at $32.02 on the New York Stock Exchange. Dell rose 62 cents to $24.57 on the Nasdaq Stock Market.

For years, Dell's unique business model of selling custom-built PCs through direct sales over the Internet allowed the Round Rock, Texas, company to underprice its competitors, who relied on more costly retail channels to move their goods.

"HP has done a lot of work on its cost structure, so it's able to be more aggressive on prices and still turn out a decent margin," Kay said.

On Thursday, when Dell reported its first-quarter net income fell 18 percent, CEO Kevin Rollins cited the tough market.

"The competitive environment has been more intense than we had planned for or understood," he said.

HP is also benefiting from changes taking place in the PC business, analysts said.

More sales these days are coming from consumers, many of whom have never owned a PC before, and that has put Dell at a disadvantage because these buyers are more reluctant to buy a machine online or over the phone.

"The consumers are a little more likely to want to see and touch what they buy," said Moors & Cabot analyst Cindy Shaw.

She said Dell's direct marketing model also is a disadvantage in emerging markets such as China and India, where phones and Internet connections are not as readily available as they are in developed countries.

HP, which has extensive relationships with stores such as Best Buy, Circuit City and retailers around the world, is in a better position to sell to such customers than Dell, she said.

As HP and other PC makers have gotten better at matching Dell's low prices, Dell has been slow to adapt, analysts said. With a few exceptions, Dell's machines have remained relatively uninteresting, said Kay, while HP's computers have started getting more stylish.

"The market has shifted," Kay said. "Everybody can make a PC that works and that's cheap, so that's no longer a distinguishing characteristic."

HP's marketing, as it borrows themes from Apple Computer Inc., also is outperforming Dell. Whereas Dell's commercials stress the type of processor and parts found in the machine, HP's ads focus on how the PC can be used to play music, organize pictures and carry out other tasks.

"As things have evolved Dell is very focused on selling hardware, and HP and Apple are focused on selling solutions," Bhavnani said.