HP splits PC lines on price

"We are targeting the Compaq brand more for the price sensitive and...increasingly targeting the HP brand to the high end," Executive Vice President Mike Winkler told CNET News.com.

The move, as earlier reported, is aimed at distinguishing the two retail PC brands in the eyes of consumers. At the same time, it will allow the company to better compete with consumer electronics giant Sony at the high end and budget PC maker eMachines at the low end of the market.

The strategy should start to take shape with this fall's PC lineup. HP is preparing to introduce a low-end $399 Compaq Presario desktop (without monitor), according to a source, while HP-branded PCs will come with high-end features such as DVD burners.

While the brands and configurations will differ, HP is also aiming to have many of its models share common components across both brands, in an effort to reduce manufacturing costs.

Prior to the merger, Compaq and HP managed PC lineups that covered both ends of the cost spectrum, often matching each other's product lineup feature-for-feature.

HP has been losing both market share in the PC market as well as the amount of space the newly combined company commands on retail shelves, analysts say.

In July, HP accounted for 35 percent of sales at U.S. retail stores, while the Compaq brand represented 22 percent, according to NPDTechworld. That's well down from a year ago, when HP accounted for 46 percent of sales, and Compaq 36 percent.

"There's been some erosion," said NPDTechworld analyst Stephen Baker. "No one should be surprised by that."

Baker said that Compaq had been reducing its exposure to the retail market even before the merger. Sony and Emachines have gobbled up market share in Compaq's wake, while Best Buy's private label PCs have also gained market share.

By keeping two brands, HP gives itself the opportunity to be more of a "fighter" with the Compaq brand while bolstering the HP name, Baker said.

"That reinforces that HP brand name--the name that is on the stuff they make money on, (things like) paper and ink," Baker said.

The move to differentiate the two PC brands comes after the company conducted focus groups and other market research studies. By contrast, in the business and corporate PC market, HP will narrow its products down to a single brand. Most of the surviving business PCs came from Compaq.

Despite the brand changes, Winkler said HP is working to make its PCs more similar "under the hood." Winkler said HP has already made significant progress in unifying the parts that go into both consumer product lines, as well as introducing common components between its corporate and consumer products. The move is also saving engineering resources, Winkler said.

"We've combined a lot of the development," he said. In addition to savings from lowering the cost of procuring parts, HP has said it expects to save $250 million annually by redesigning its products and simplifying its product lines.

HP is also reducing the number of different configurations for both its direct and indirect businesses. The company has already cut the number of different product options it offers to resellers.

CEO Carly Fiorina has said that the PC unit's return to profitability is a key goal for the combined company.

And although labor represents just a fraction of the overall cost of a PC, Winkler notes that the company has been able to cut its costs for labor and overhead by 40 percent. The company is consolidating plants and reducing the number of warehouses that hold both parts as well as finished computers.

News.com's Dawn Kawamoto contributed to this report.