Hewlett-Packard’s (HPQ) announcement Thursday that it would not spin off its mainstay personal computer business sent mixed messages.

HP backtracked on its plan, floated in August, to spin off its low-margin, $40.7 billion PC-making operation after the move was forecast to incur costs refigured at $1.5 billion vs. earlier estimates below $400 million. Other issues, regarding supply chain and brand ownership details, also played into the decision.

Analysts are now carefully tuned to pricing and margins, watching just how far HP will pare back its PC pricing in order to defend its No. 1 PC market share.

A toddler gets computer savvy at an Apple Store in Shanghai. Developing markets like China remain a stronghold for PC sales, while notepads and… View Enlarged Image

The test is set against the backdrop of a much larger trial for the PC trade.

Vast armies of consumers are now cozying up with iPads rather than buying new notebook PCs. Businesses are looking to the iPad and other tablets as a way to improve productivity and collaboration, which could also eat into demand for PCs.

Apple (AAPL) essentially created the tablet market with the iPad, launched in April 2010, and still gets the bulk of sales. Personal computer and smartphone manufacturers have answered with rival tablets, but none have gotten traction yet with buyers.

Apple Chief Executive Tim Cook said Oct. 18 that he thinks tablets will one day outsell personal computers.

“It’s pretty clear to me that if you forecast out in time that the tablet market … will be larger than the PC market,” Cook said. Touch-screen tablets are easier to use than PCs and that makes them compelling, he said. “It’s a huge opportunity for Apple across time.”

Apple has sold 40 million iPads as of the end of the third quarter. It’s expected to account for 73% of tablets sold to end users this year, with vendors selling tablets based on Google ’s (GOOG) Android operating system coming in second with 17% market share, research firm Gartner says.

But competition will pick up this holiday season when Amazon (AMZN) releases its Kindle Fire tablet for $199, which is less than half of the iPad’s starting price of $499. Next year, Microsoft (MSFT) will take a serious crack at tablets with its Windows 8 operating system.

Meanwhile, PC sales are sluggish. Gartner estimates that PC shipments will rise just 3.8% this year to 364 million units worldwide. However, it expects PC shipments to rebound next year with 10.9% growth.

1. Business

IBD’s computer hardware and peripherals industry group includes 21 companies. The group is dominated by Apple, which makes Macintosh computers in addition to iPads, iPhones and iPods.

Traditional PC vendors Apple, Hewlett-Packard (HPQ) and Dell (DELL) lead the category by market capitalization.

Makers of printers, copiers, digital cameras and other peripherals are represented in the group as well. They include Canon (CAJ), Fuji-film (FUJIY), Xerox (XRX) and Lexmark International (LXK).

The personal computer industry has matured and the standard Wintel configuration of Microsoft’s Windows operating system on Intel (INTC)-based chips is now a low-margin, commodity business.

That’s what pressured HP to consider spinning off its PC business into a separate company. Its goal was to focus on higher-margin enterprise hardware, software and services. By doing so, it would have followed IBM (IBM), which sold its PC business to Lenovo in 2005.

Consolidation has left the industry with a handful of major PC vendors. HP bought Compaq in 2002 and Acer bought Gateway in 2007.

Personal computer makers, such as Dell and HP, have been diversifying into more profitable businesses like servers, data storage and networking gear for enterprise customers. They’ve left the low-priced PC segment to Asian manufacturers like Acer, Lenovo and Asus, and are trying to compete on higher-end PCs.

Meanwhile, Apple has managed to maintain higher margins for its computers because of its proprietary software, design savvy and brand clout. It’s also built an ecosystem of software, services and accessories that supports products across its portfolio.

The key to success for computer companies is to come up with unique products and not just copy Apple, says Shaw Wu, an analyst with Sterne Agee.

“As Apple has shown, if you can produce very differentiated products in this space, consumers and businesses, even in a soft economy, will buy those products.” Wu said. “All a lot of these companies are doing now is copying Apple and trying to catch up to Apple. What they should be doing is inventing something new.”

Most PC companies are little more than PC assemblers now, says Michael Holt, an analyst with Morningstar.

“They’re taking Intel chips, Microsoft software, Samsung memory and Western Digital hard drives and slapping it all together,” Holt said. “They don’t have a lot of their own (intellectual property) in there.”

Wintel PC makers have honed their supply chain efficiency to squeeze more profits, but that strategy is losing its edge, he says.

Only Apple, which has differentiated itself on software and industrial design, is now able to command premium prices. Apple’s gross profit margin last quarter was 40.3%, compared with Dell’s 22.5%.

• Name of the game: Companies that succeed in the computer industry are those that innovate and make distinctive products that customers need or desire.

2. Markets

Developing markets — like China, India and Brazil — have been hotbeds of sales growth for PC and peripherals makers, helping to offset weakness in North America and Western Europe.

“The global PC landscape is being reshaped,” Intel CEO Paul Otellini told analysts Oct. 18. “Emerging markets now represent two of the top three consumption PC markets in the world. China is now the No. 1 PC consumption market in the world, while Brazil has become No. 3.”

Consumers in mature markets like the U.S. typically have multiple PCs in their households and are more likely to augment those with tablets or smartphones. Meanwhile, people in developing countries are buying the first PCs for their households.

“What you’re seeing now is tablets substituting for people’s second, third or fourth PC” in developed markets, said Ezra Gottheil, an analyst with Technology Business Research. “In the past, they might have gotten another PC. Now people are looking at tablets.”

One of the shortcomings of the PC industry is that PCs have become a replacement market in many countries, says Ashok Kumar, an analyst with Rodman & Renshaw.

“Without a compelling hardware or software upgrade cycle, people will run their PCs until they die,” he said.

The next big milestone could be the release of Microsoft’s Windows 8.

3. Climate

Concerns about economic stability in the U.S. and Europe are weighing on PC companies. If consumer and business spending worsens, it could place additional drag on PC sales.

During the recent recession, businesses postponed upgrading their PCs. The impact on diversified firms like HP and Dell was lessened by the fact that enterprises continued to spend heavily on servers to enhance their data centers and networks.

Favorable component prices have boosted PC profits in recent quarters, but major flooding in Thailand this month has affected companies that supply hard disk drives, including Seagate Technology (STX) and Western Digital (WDC).

A shortage of hard disk drives is expected and prices for the component could go up 25% over the next six months, says Brian Marshall, an analyst with ISI Group. That could cut Dell’s earnings next year by 5% and HP’s by 2%, he says.

4. Technology

This holiday season, the first ultrabooks will hit the market. Ultrabooks are a category of thin and light notebooks backed by chipmaker Intel and Windows PC vendors. They aim to compete with tablets and Apple’s popular MacBook Air notebook.

Ultrabooks feature instant-on capability and long battery life and will start at less than $1,000.

But Ultrabooks won’t be a big-volume product until manufacturers can get the price down closer to about $600 or $700 — the current average selling price for notebooks today, Kumar says.

“Whether ultrabooks will end up being a saving grace for the PC industry remains to be seen,” he said.

Next year, Microsoft is expected to launch Windows 8, which will support touch-screens, low-power ARM (ARMH) processors and feature a radically redesigned user interface.

The explosion of touch-screens on tablets and PCs has been a boon for Synaptics (SYNA), which makes chips for touch interfaces.

“You’re going to see touch-screens everywhere, not just in PCs, smart phones and tablets,” Wu said. “You’re going to see them in automobiles, health care, appliances and consumer electronics. That’s what makes Synaptics interesting.”

On the horizon are new Intel chips that feature a 3-D transistor design, which offer higher performance and lower power consumption. Products with the new chips are expected to roll out in March 2012.

5. Outlook

Enterprises still have lots of old PCs running Windows XP to replace. That operating system is now 10 years old and showing its age. The latest version, Windows 7, is slowly replacing XP in homes and businesses. But Windows XP is still on about half of PCs in use.

The ongoing refresh cycle looks to be a driver of PC sales, even before Windows 8 arrives, probably in late 2012.

Apple should be able to ride the wave of iPhone and iPad adoption for several more quarters before people start wondering what’s next for the tech giant. Whether Apple can continue to be an innovator without the guidance of its visionary co-founder Steve Jobs, who died Oct. 5, is the subject of much debate in the industry.

• Upside: PC companies stand to benefit from the ongoing PC refresh cycle and the arrival of ultrabooks and Windows 8. Tablets are a major growth market and opportunity for PC firms if they can find a way to compete with Apple.

• Risks: Personal computer firms are losing sales to tablets and need to find an answer to Apple’s iPad juggernaut. Also, hard disk drive shortages and larger macroeconomic issues are concerns for the sector.

Source:http://news.investors.com/Article.aspx?id=589732&p=1