HP Without IPG – What are They Thinking?
One of the pleasures of the consulting business is the variety of people you have the privilege of working with, from end users to vendors to other “interested parties” in the industry, such as the Wall Street gang: hedge funds, institutional investors and the like.
As a whole, these people are fascinating: highly intelligent, quick studies of new topics, and yes – fascinating because they hold more than a few destinies in their collective hands with millions of dollars that they may choose to point at this industry or that company.
But a recent article by PrintWeek quoting a member of the investment community left me speechless, at least for a moment. The basic premise is that HP is considering selling off IPG, their printing division. This falls into the category of 1) What were they thinking when they issued such a prognosis? or 2) As smart as these guys are, do they really understand the charm (= profit drivers) of the imaging industry?
So how did they come up with this idea? Here a few guesses:
- That’s what IBM did years ago, and HP is currently “doing an IBM.”
- After the PC and WebOS divestitures, HP needs to focus further, and that focus will be on software and services, not the printer business.
- The hardware business is unforgiving and should generally be avoided.
At the highest level, these are all somewhat valid points. But let’s look a bit closer:
The IBM factor – IBM is certainly not a bad model to emulate, but that does not mean taking exactly the same steps and building exactly the same business. Yes, IBM got out of the printer business – well, technically that’s not quite true. They sold off a pile of lackluster businesses, including printers, supplies, typewriters, keyboards and the like. Somebody at the new company recognized a gem in the trash heap, closed down those other business areas and set up a strategy to rebuild the printer business. Now while the HP’s (and everybody’s) printer business can use some tweaking, it is not a problem area that needs to be rebuilt. So let HP become more IBM-like, but do not infer that every move has to be emulated.
The focus factor – large enterprises like HP have a huge number of moving parts, including products, supply chains, sales and support skill sets and profitability models. Focus is necessary, but assuming overall management and execution is in order, that last point (profitability) will trump just about everything else. And IPG has remained respectably profitable, at a level that the other HP business areas aspire to. The operating profit of around 15% is nearly triple the level of the PC business and ahead of enterprise hardware and even services. Sounds like an area for more focus in the future, not a divestiture candidate.
The hardware factor – there is no question that some hardware business is unforgiving and unrewarding, especially in the retail space. Lexmark pulled out of the entry-level consumer space and is not regretting that decision. The low-end printer business is about to get even more aggressive and competitive, with new products announced by Lenovo, LG and Seine – “hailed as the first from a Chinese company based on intellectual property developed in China” – so watch out in the low end! But what about enterprise mid-range, what about Indigo? If you look upmarket and follow the value indicators (volume, color, MPS), multiple revenue and annuity streams deliver great overall business results with hardware wrapped into the package. Want to leave the hardware business? Talk to Xerox about it. They may even encourage you to do it, but watch them (and others) fill that gap, and capture the service, software, applications, etc. as well. In a nutshell, hardware is not as bad as its reputation, and more than a few voices at HP know how to articulate that point. And they have the numbers to prove it.
So who really knows whether IPG is up for consideration? HP has recently shown their capacity for surprizing the market, and regardless of whether the market likes being surprized or not, that tendency breeds such discussions. But look at the wealth that HP has amassed around IPG: technology IP, brand equity, skill sets, revenue streams, complementary business areas, . . . I have no inside information regarding these topics, but given the business as I know it – no way. But thanks anyway to Mergermarket and their unnamed industry sources for providing the scenario to trigger these thoughts.
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Doesn’t Canon make most of HP’s printers. That would make them a large middle man between Canon on the reseller. this may not be the place to be in the future. Let Canon handle all the items and sell the services. Also, with good software that solves business process management why do we need so many printers?
The other part of their printer business….supplies is under relentless attached by a better quality of reman companies. This group is so good they have products that out last and out preform the OEM product.
Cash out and move forward might not be a bad plan. This will also allow them to provide a wide variety of products to their customers like they have started to do with the Canon MFP line.
IPG is next…no telling when.
Yes, HP’s buys their laser engines from other manufacturers. That is certainly a disadvantage, since those products are a better fit for the high-volume / high-value sweet spot of the printing business. Normally it would be best to own your technology in the growth space – which explains the Edgeline initiative. And yes, third party supplies are a challenge as well.
Still, I doubt that the logical conclusion is to pull out of the printing and imaging business altogether. There are too many revenue and profit streams to ignore, and there are still many opportunities for HP to add “original value” along the various links in the value chain. They are probably considering next steps for IPG, but the chances are higher that they will be looking for organic or acquisitive expansion rather than getting out.
Selling their PC division makes a lot of sense to me. It is a low margin, highly commoditized business. No future here.
On the other hand, IPG – the printing group, is a cash cow. Unless it is losing steam (for instance, due to managed IT/print services?), selling it sounds like a crazy move. It has been keeping the rest of HP afloat for a long time.
Could it be that the gold we call toner is tarnishing?
David, you as a wise man will remember that gold never tarnishes . . . ; /
That said, I have heard the phrase from several other vendors that their advantage in the MPS space is that they are “not addicted to toner.” Which means: there is enough money in the business without the consumables, and presumably without hardware as well. Great for those guys, but if you have the consumables revenue stream well established (like HP), it’s fair to say you will keep that portion of the business going and add other strands of revenue as well. Sounds like an opportunity, not a problem!
WELL WRITTEN ARTICLE EXCEPT FOR ONE FUNDAMENTAL ERROR… THE AUTHOR DID NOT PAY ATTENTION TO THE BUSINESS UNIT HP IS CONSIDERING SELLING OFF. IT IS PSG….NOT IPG!!!
CHECK THAT YOU CORRECTLY OVERHEARD THE RUMOUR BEFORE WRITNG THE ARTICLE CHAMP!
Hello Martin,
I’m pretty sure the author is aware of the PSG rumor. In his article he is actually referring to the speculation made by PrintWeek, which he refers to and links to in his post. I suggest you read that article here. The very first paragraph of that article says: “While there is no active sale process for the $25bn Imaging and Printing Group (IPG), Mergermarket has quoted industry sources as saying that the sale of IPG would appear to be necessary to HP’s transformation into an enterprise solutions company.” So, Rob’s article is simply a commentary based on this industry rumor and not the PSG speculations.
Misty, thanks for your response – your are the champ!
Just to clarify, the situation with PSG is not rumor or speculation, it is stated HP policy to “investigate their options.” The IPG angle is totally unsubstantiated, but the uncertainties raised by the other recent HP announcements give rise to such discussions. Interestingly, I have heard them repeated a few times since then, but I do not change my position that this option is not seriously on the table.