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HP, Dell and the paradox of the disrupted

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If a picture is worth a thousand words, what story does the above picture tell? It tells the story of one of the most dominant coalitions of our time — Wintel — coming apart at the seams. In quantitative and qualitative terms, it suggests that if this is the best that the four horsemen of the PC industry have to offer going forward, this tale won’t be ending too well. And things are looking particularly grim for Hewlett Packard and Dell, the two best-known faces of the personal computing industry (see also, “HP: The Garage is Closed”).

As much as anything, it’s a stark reminder that disruption doesn’t give a crap about legacies. This is something that I have seen again and again in my twenty years as an entrepreneur in network infrastructure, Web-based services and mobile applications.

Once upon a time, Dell was the personification of the American dream. Born in Michael Dell’s college dorm room, Dell’s founding had the homegrown optimism of a Norman Rockwell painting. Dell was the embodiment of scalable build logistics, coupled with standout customer service. It was the Amazon of personal computing — before Amazon existed.

As for HP, you remember “the HP way” and the original “two founders in a garage” narrative, right? The company was a true force driven by clear directives such as, “attack the undefended hill” and “number one or two in each targeted market.”

However, there is a paradoxical truth. Although disruptive change takes far longer to occur than most people account for, once it kicks in, it steamrolls incumbents faster than they can course-correct.

The paradox of the disrupted

At its core, the Dell and HP story is about the shift to integrated, differentiated systems lead by software (see also, Mark Andreessen’s “Why Software is Eating the World”). Like most hardware-centric companies, neither HP nor Dell ever grokked software, certainly not in terms of any integrated strategy (JetSend, Chai and WebOS were all failed software efforts by HP). This gets to the nut of why these guys missed the boat on mobile and tablets. HP, after all, actually owned Palm, yet lacked both the clarity and conviction to intelligently pursue the software play required to succeed in mobile — only the single largest segment of the next 20 years!

Then again, they didn’t think they had to. After all, the horizontal model that made Microsoft a lethal killer in segment after segment had dominated the conventional wisdom of the preceding 20 years. Built on the premise of industry alignment around loosely-coupled, but coordinated efforts between hardware and software component makers, the horizontal ethos dictated that hardware folks worry about hardware and leave the software differentiation to the software guys — separation of church and state, so to speak.

We’re all lemmings in terms of following what works. So when the horizontal model made Bill Gates the richest man in the world, industry after industry embraced it as the one right way.

With the advent of the Internet, however, a vicious cycle of commoditization — horizontal’s downside — began to play out. We are now at the endgame of that cycle, a point where few companies can make money via commodity economics, and HP and Dell are Exhibit A and B, respectively.

I believe that the next 20 years will look a lot less like the Microsoft model and more like the Apple differentiation model, where every effort is focused on the central goal of delivering complete product solutions and richer, more satisfying customer outcomes. In other words, we’ll move to an economy where businesses and industries are defined by tight integration from bricks and clicks to hardware, software and service — aka, the vertical model.

Does either HP or Dell have what it takes to make this transition? No one really knows. But what gets me excited is that some companies will figure this one out. Their success will, in turn, provide the roadmap to re-invention for the next generation of innovators to follow. We are lemmings after all.

So get ready, as we are at the end of a cycle, and approaching the beginning of a new one. It’s post-global, post-digital and post-commoditization. The new cycle is all about making the inefficient more efficient, and creating differentiation where commodization exists. The rise of integrated systems is upon us.

Mark Sigal is an eight-time entrepreneur, whose ventures have sold to Apple, IBM and Intel. He is chief product officer at Unicorn Labs, an eBooks and eLearning platform provider.

Image courtesy of Flickr user Mike Licht,

32 Responses to “HP, Dell and the paradox of the disrupted”

  1. Michael Elling

    In 1996 I wrote “To break the Wintel monopoly break the Bell monopoly”. Well I was only partially right and it took much longer than I thought. The competitive digitization WAN, data and wireless waves unleashed in the 1980s and 1990s did in fact carry over with a “broadband” revolution. Unfortunately broadband pricing disconnected from moore’s and metcalfe’s laws about 10 years ago due to inefficient and counterproductive (de)regulation. It is now 20-150x more expensive than it has to be. When the 4th and final wave of last-mile broadband IP digitization hits, it will be interesting to see how the chart looks in 10 years.

    • netgarden

      @Michael, great point. When true broadband hits, then (in theory), Sun’s vaunted mantra, ‘The Network is the Computer’ starts to become plausible, bringing with it wholesale categories of peer-to-peer or cell-based computing models.

      • Michael Elling

        I partially agree. History has shown there is a tradeoff between transport and switching and where processing occurs. Some processing naturally lends itself to occurring at the edge (sensory feedback and translation). Other processing may initially make sense at the core but then gets distributed more to the edge. Add to that the evolving revenue model and who pays for the “session” and the model is far from static. I refer to it as “centralized hierarchical networking” where all layers are in a constant state of expansion to the edge and collapse to the core. So the boundary points in each layer are constantly shifting; as is the relative value and importance of any given layer. An example of this is the evolution of the session border controller in the IP world.

  2. If you want to change with the times you have to write your own operating system, if you want to be in the game, HP could have but ran away from Web OS, Microsoft no matter how late they come to the party is always in the game because they have a operating system, hindsight being 20/20 all of those computing companies in the 70’s and 80’s who had hardware and operating systems could have made it into the 21st century if they had vision and the will, IBM, Sun, SGI, Digital, Dec, Commodore (Amiga), and Palm all these companies had hardware and a OS, but had no faith, vision or will to do anything different from the larger PC market, each of these companies in their prime made more money margin wise than any of the PC box makers, Apple (with Steve Jobs) however was the only company that actively wanted to change the rules of the game or at least sidestep them, hardware along with a OS always makes change ultimately possible.

  3. Its all about cycles.
    The Minicomputer->Workstation->BigSMP->1U->Multi-core->???????
    Every decade there is a transition. DEC missed the first one. SUNW missed the BigSMP->1U (Webscale). Now its all about Cloud. HP can survive as it can get into solutions and services. Dell like SUNW is a gadget/device company and its out-of-luck. The more interesting question – what should Dell do now since the desktop/laptop has gone Asia/Apple. The server is going public cloud and integrated solution (Oracle type). What do you do?

    In my mind it has to figure out the ‘????’ above or become roadkill

    P.S (I left PC out this – as its a purely infrastructure transition flow above)

  4. Good article but a lot of comments that poke holes in it. Everyone has an opinion, not sure if we agree with anything except the big companies always have a hard time getting out of their own way…Apple being an exception that benefitted from great design, timing and figuring out how to monetize content while everyone was stealing it from those who would not change their model. We will see how successful Apple stays as they try to win the battle of closed architecture and gauging consumers on all the Apple-related accessories that is bound to come – just t like the continuous rounds of upgrade cycles in Wintel architecture during the last 20 years…

  5. mobileforhealth

    I think the conversation needs to be of what is the nature of the next cycle/wave. All of this is post mortem which is easy to accomplish. What we should warrant is to decode the underlying trends (macro and micro) that should then anticipate /evaluate Google and Apple strategy for the next 10 years. We are all collectively good analysts and do a good job of retrospect.

    • Hamranhansenhansen

      There are 2 distinct PC games, not one:

      – $999 and up is 90% Apple (Mac)
      – under $999 is 25% Apple (iPads) after entering that market only 2.5 years ago

      … so Apple is winning.

      Further, Apple’s Mac average selling price (ASP) is $1350, and their iPad ASP is $600, and Apple takes a 30–40% market there and then also sells application software of its own, as well as software and accessories for others, for which they get a tiny cut. The ASP of a Wintel system is less than $400, and the hardware maker such as Lenovo takes 10% and has no aftermarket products. So the difference in the money is dramatic. That is why Apple takes most of the profit in the PC market. More than the rest combined.

      So Apple is winning.

      What’s more, Apple has loyal users who depend on unique features of Apple products (for example, a TV news person who shoots and edits reports from the field on iPhone cannot choose another brand of phone without losing the video editing. 95% of Apple users buy another Apple next time. But generic PC makers have no brand loyalty, and they are buying mostly terminals — a PC to run the Web, or a PC to run office software. Lightweight client systems that are almost disposable. Those systems are being replaced with iPads at a wholesale rate because it is so much cheaper to deploy them, they require almost no training, and the user gets mobility. The I-T setup on an office PC can cost more than a whole iPad.

  6. Hi, thanks for the thought provoking analysis. Yet, I have some questions:

    – Google. You could say that Google is vertical, as it is is building a ecosystem (Youtube content, Google Apps, Android etc.) . Yet, Google’s core is “search” or ‘information processing”, not content, and Google’s services are device and operating system independent. So, you might as well call it a successfull ‘ horizontal’, which would sort of undermine your thesis that verticals have the future…… Could you shed some light please? What am I missing here?

    – HP and Dell. They specialized in hardware (=horizontal) *and* made themselves dependent of one operating system: Windows. In a way, the same position as Zynga which completely depends on Facebook….If the ship sinks, you go down with it…..Compare that to Samsung, who make Windows and ChromeOS PCs and laptops, plus mobile devices under Android and other Linux-like systems (Tizen, Bada) but also Windows Phone (or 8, whatever) mobiles. Keeping all options open!

    Dell has half heartedly sold some Linux laptops, hidden 30 clicks deep in their webshop…..They never invested real energy in promoting for instance Ubuntu powered laptops along all the Windows offerings. HP has tried harder to have more options besides Windows – they bought Palm, they developed WebOS, but somehow they failed. On the PC side HP has done nothing to escape the sinking Windows ship……

    What if they would have had some guts and vision, and would have developed together with Ubuntu – the most consumer friendly Linux version – some attractive, hardware vendor supported laptops, and pushed those aggressively in the market?

    So, I’d say that Dell and HP are not only punished for being to horizontal, but also for depending on one sole partner (MS), and not daring to take any risk in terms of PC operating systems (and no, offering one laptop hidden deep in your webshop is not “daring”).

    What’d you say?

    • HP’s troubles aren’t due to the fact that they are tools and have no own software. They built their business models around scale and lost with the rise of Asian manufacturers with larger scale and lower costs. It happened because they failed to differentiate themselves as a brand. I don’t know about Dell, but in HP’s case it was a conscious decision made by Hurd at one point.

    • netgarden

      @pieter, Google shows a clear trend towards hardware-software integration in buying Motorola, rolling out their own branded devices, and launching Project Glass. If you think about it, their primary revenue and profit generator is via a tightly integrated relationship between search, adwords and adsense — i.e., a systems-based approach. Plus, they build their own proprietary hardware-software systems to power their own network. Again, these things are rarely as clean as either ‘all horizontal’ or ‘all vertical’ (e.g., Google’s ethos is more horizontal than Apple’s), but that’s the gist from my perspective.

      As to HP and Dell, there unfortunately is very little proprietary or differentiated in their hardware, so beyond the singular dependence of Windows, that’s a key factor. But then again, homogeneity was always a feature, and not a bug of Windows.

      Frankly, a lot of this comes down to having a platform vision and the intestinal and organizational fortitude to execute on it over time. Dell and HP haven’t had it. Apple, Google and Amazon clearly do.

      One can even say that in the software only domain, Facebook has a platform vision, but Yahoo hasn’t, which in part, explains why despite both companies having oodles of users, and tons of services, one company has a clear future (Facebook), and the other may or may not (Yahoo). Here’s hoping that Yahoo CEO Marissa Mayer has religion about making Yahoo into an integrated platform — first within Yahoo — and then beyond its four walls.

    • Hamranhansenhansen

      Google’s core is not Search, it is ad-supported content. Over 90% of Google’s income is from ads placed on Google-owned websites. Search is essentially an ad for the ad-supported content. Search brings a user to Google looking for video and Google shows them YouTube and makes money. The ad for Search is “The Internet” which many users cannot tell apart from Google. There is nothing horizontal about Google. This is the company that was gifted with the backend service provider job on iPhone and then tried to cut Apple out of that loop! Only about 1% of Google’s ads appear on websites that are not owned and operated by Google.

      The HP/Dell problem of shipping homogenous software used to be called the main benefit of the PC industry. That is how much things change.

      Keep in mind, Samsung has no apps. Users may get their first smartphone from Samsung and not care what software it runs, but to get PC-class apps on ARM they have to go to Apple. What Android calls “apps” are just Java phone applets with much, much more limited functionality than Apple’s apps, which are the same native C/C++ as Mac, Windows, Linux, game consoles. Nobody has those on ARM but Apple. Samsung will have to go vertical to attract software developers and real apps. Android apps are a Web-like app experience that you can get for free on iPhone — iOS apps are a Mac-like experience (video editing, 3D graphics, multichannel audio.) The Mac-like apps are what users re willing to pay for because they are so much better than the fee Web.

  7. gregorylent

    i will disagree with mark on his take for the new cycle, since i think he still is thinking in terms of competition , despite his nod to integration ..

    cooperation will be seen to be more evolutionarily advantageous, and we actually don’t yet have business models for that .. yet.

    the next cycle will be a higher order of functioning.

    • netgarden

      @gregorylent, I think that the point that I am making is a bit more nuanced than that. The competitive factors that will drive companies to build integrated hardware-software solutions is that that’s what the CUSTOMER will expect, and that expectation is where the margins (and viability) come from.

      Also, to be clear, I am not suggesting that horizontal models will go away. That’s a false dichotomy. I am suggesting that the dominant trend for breakout companies will be to delivery fully integrated solutions. There will be component suppliers that stick within that model and remain viable, but are of course, vulnerable to co-option.

  8. It really is about cycles, and the failure to recognize them. If you go back even further, computing started with a vertical model. Back when it was called data processing, companies bought their hardware, software, and peripherals from one integrated vendor (e.g. IBM). Those lemmings were just as slow to realize the shift when PCs appeared. No doubt, today’s disrupters will fail to recognize the next cycle as well. Every generation is convinced they are different and know the one true way. Unfortunately, technologists have a very poor appreciation for history.

    • Jeff Putz

      Yeah, I’m well aware of that, and as I said, Apple was nearly dead at that point and could only go away or make incredible gains. Google was still a kid relative to HP and Dell. You can’t pretend there’s no context there.

      • netgarden

        Well, everything is a function of context. In this case, the context for Apple was a shift from fighting and losing in a commodity driven market to one where hardware, software and online integration as a platform was the game changer.

        Amazon wouldn’t be Amaxon without robust connectivity, and they have been an integrated platform player on multiple levels. Same with Google.

        If anything, the context is that the PC folks saw the same trends from the cash rich incumbent seat and REPEATEDLY missed the boat.

      • Hamranhansenhansen

        Apple had a rough 18–24 months in 1996–1997. By the end of 1998, Apple had the #1 best-selling notebook (PowerBook G3) and #1 best-selling desktop (iMac) and also the fastest PC (Power Mac G3.)

        I still don’t see your point. PC companies are way down and PC’s are shrinking while tech companies who put something other than the PC at the center of their universe are thriving. That is a fact. The data in this little info graphic is correct. Apple is not a fluke — they simply put one foot in front of the other and made progress every single quarter towards their goals. The generic PC makers sat around waiting to copy Apple as usual, but then Apple took the Mac to Intel and wiped out the high-end Wintel market almost completely, and then Apple created a new kind of Mac that HP/Dell could no longer clone in iPhone.

        I’m sitting right here in Silicon Valley watching this all happen that whole time. I was running Mac OS X and iPod in 2001 while most were still using Windows 98. It was clear at that time that Wintel was going to have to elevate their game beyond a 1982 PC BIOS and an 80’s Mac/NeXT clone built on 80’s MS-DOS. But it was already too late because OS software and hardware platforms take years of effort just to move them a little bit in any new direction.

  9. HP and Dell are what happens when you focus on share price – you cut spending on R&D (or in Dell’s case, you never really have much to begin with), and use your “brand” and your channel to sell commodity products. They are technology companies run by non-technologists who believe technology doesn’t matter. So guess what happens when technology evolves? They get left behind without opposable thumbs.

    Intel is like the guy who was born on third base and thought he hit a triple. They were handed a pseudo-monopoly and thought they were business geniuses. Their main business generates 11 digits worth of revenue and incredible profits, and they only want to create new products that have similar markets. They don’t realize that there aren’t that many 11-digit products, nor that profits in a competitive market are much harder to come by. Sell a $7 ARM chip? No way, not for a company that sells $70 x86’s.

    Microsoft didn’t commit the same sins as those first 3 companies, but once Gates left, the leadership was unable to interpret and respond to the technology tea leaves. Because they also don’t have that almost monopoly, and they are followers instead of standards-setters in mobile computing, they will be lucky just to hang on.

    These four companies should be case studies for business schools to repudiate their previous teachings. If you want to remain relevant in the tech world, you can never rest on your brand and your channel – the two tools of sales-driven managers, and you can’t scrimp on R&D to meet profit goals – the short-sighted strategy employed by CEOs who used to be CFOs and COOs to keep their Wall Street masters happy.

    • @keninca, all good points. It seems that Dell and HP had great (unfounded) expectations for the introduction of expensive higher-margin Intel-based Ultrabooks. One year later, that was an apparent anticlimax.

      According to new research from Barclays, Ultrabooks accounted for only about 5 percent of all laptops sold in the second quarter. That’s not even half of what the PC manufacturers who make them had been expecting.

      • Hamranhansenhansen

        Apple has over 90% of the high-end PC market ($999 and up.) The high-end systems that Apple doesn’t have are not notebooks, they are things like AutoCAD workstations and bank machines which function essentially the same as they did 10 years ago. There is no high-end Windows notebook market. The average Windows PC sells for $399 where it competes with entry-level iPads. HP and Dell do not have high-end operating system software or apps or modern hardware know-how to build a high-end notebook.

        Ultrabook is just Intel trying to create a secondary market for the tiny, low-power, high-end chips it made for Apple’s MacBook Air. But everybody who wants a MacBook Air already has one, because they ave been available for almost 5 years and they cost less than $1 per day over the standard 3-year working life of a Mac, with outrageously low app prices, no viruses, no I-T support required, and so they pay for themselves very easily.

        If you imagine Tata trying to take market from BMW, that is Dell or HP making MacBook Airs.

        Generic PC makers always expect to sell a generic version of every Apple product, but today, Apple has much larger economies of scale than the PC market, and Apple products have been refined constantly during the 21st century while HP/Dell shipped Windows XP for 6. The PC makers don’t have the technology to clone Apple anymore, and even if they did, they would be more expensive than Apple.

        That is why Windows is morphing at full speed into an operating system for iPad clones based on cheap ARM processors. At a $399 price point, saving $150 on parts by switching from PC-class to iPod-class hardware is essential. But since HP and Dell ignored ARM from 1993 when Apple shipped the first mobile ARM system until 2010 when Apple shipped the first successful ARM PC platform.

  10. IBM really should be in your chart as they, like Apple, are an example of a company that was there at the beginning but evolved to keep up with and beat the disruptive players. Instead of becoming a consumer gadget company like Apple, they became a business software/services company – exactly what HP and Dell wish they had become.

    Otherwise, really enjoying your articles and analysis