HP PC spin-off puts pressure on Microsoft to nail Windows 8

Hewlett-Packard's sale or spin-off of its PC business will put pressure on Microsoft to "hit the ball out of the park" with Windows 8, an analyst said today.

"This is concerning no matter how you look at it," said Wes Miller, an analyst with Kirkland, Wash.-based Directions on Microsoft, a research firm that specializes in following Microsoft. "HP has been a very strong partner of Microsoft for a very long time, so you have to ponder the change in its strategy."

A sale of HP's Personal Systems Group (PSG) is an indication of the decline in the importance of the PC -- and thus Windows, which powers the vast majority of personal computers -- in favor of other devices, including smartphones or tablets that run other operating systems, said Miller.

And that puts the heat on Microsoft to crank out another OS winner.

"This re-emphasizes the need for Microsoft to hit the ball out of the pack with Windows 8," Miller said.

Windows 8, which doesn't yet have an official release timetable, will radically revamp the 21-year-old operating system's look and feel and will run on tablets, Microsoft has said.

Earlier Thursday, news outlets, including Bloomberg and the Wall Street Journal, cited sources familiar with the matter who claimed HP would announce the spin-off of PSG later today during or after its quarterly earnings call, which is scheduled for 5 p.m. ET.

HP has confirmed that it is shuttering its webOS-based device business -- including the just-launched TouchPad tablet -- and looking at "strategic alternatives for its Personal Systems Group" that may include "a full or partial separation of PSG from HP through a spin-off or other transaction."

"HP sees the future where the PC is not the focus," said Miller, "just like IBM did in 2005."

Six years ago, IBM sold its PC Company Division to China's Lenovo.

But a sale or spin-off of HP's PSG -- the world's largest seller of PCs last quarter, according to Gartner -- doesn't mean the death of the personal computer.

"PCs will remain highly strategic because they run the apps that run businesses," said Mark Margevicius, a research director at Gartner. "The fact that everyone is struggling [selling PCs] does not makes the platform any less strategic to business. PCs are a worldwide, 100-million-unit business. It's not dying in any way."

The PC sales attributed to HP won't suddenly evaporate because the division is run as a separate entity, or sold to a rival, said Margevicius. "Ultimately, someone will own the business."

For the short term, then, Microsoft is unlikely to notice any difference in Windows sales.

However, like Miller, Margevicius saw the move as a signal of a troubling trend.

HP will retain the webOS operating system it acquired last year from Palm, but it will halt development and production of any tablets based on webOS.

HP's webOS-based TouchPad went on sale only a month ago, and several former Palm executives, including former Palm CEO Jon Rubinstein, currently have high positions in HP's Personal Systems Group.

"HP tried to put the defibulator on its PC business with the TouchPad, but it's not yielding the kind of results it wanted," said Margevicius. "The patient isn't dead, but it's moved into assisted living."

Ironically, Miller saw the withdrawal of HP from the tablet hardware business as a win for Microsoft.

HP made it clear that it was betting on its own webOS, rather than Windows 8, for its tablets. By exiting the market, it means that there's "one less partner" to convince that Windows 8 is the right OS for tablets.

"For Windows 8 to succeed [on tablets] Microsoft needs a partner that's passionate, and one that will work with Microsoft to make a great tablet," said Miller.

Both Miller and Margevicius attributed the decision by HP to dump the PC side of its business to the small, fragile margins on Windows-based personal computers.

"This is MBA 101," said Margevicius. "This part of their business may be attractive from a legacy perspective, but it's the part of [HP's] business that generates the least amount of revenue. And HP is run by someone with no strong ties to hardware. [Leo] Apotheker has three things in mind: software, services and support, and not particularly in that order. All those businesses are far more profitable than PCs."

HP hired Apotheker, a former CEO of German software and support giant SAP, as its president and chief executive in September 2010.

Margevicius said that Dell, the world's No. 2 PC seller, will likely reap the most benefit from HP's ridding itself of its PC group. "Dell will be viewed as the vendor that is safe and solid," he said.

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