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Want innovation? Upgrade your PC, not your phone, says HP

Ron Coughlin, head of HP's personal computer group, believes his industry is sizzling, not stagnant. Also: Touchscreens beat Apple Touch Bars.

Ron Coughlin, head of HP's Personal Systems Group

Ron Coughlin, head of HP's Personal Systems Group

Stephen Shankland/CNET

With the flood of iPhone publicity this last month -- this last decade, actually -- you might think personal computers have become ho-hum.

But Ron Coughlin doesn't. The leader of HP's PC division thinks his industry has snatched the initiative for technological improvements back from phones.

"The innovation is happening in PCs," Coughlin said in an interview with CNET. His basis for the opinion? We're increasing PC spending while decreasing phone spending. And he shows off one example of how PCs are changing: HP's Omen X gaming PC, which fits into a backpack harness so you're not tethered to a desk for virtual reality gaming. HP just repurposed it as the Zvr system for businesses that want to use the system for simulations or other immersive situations.

For many, upgrading a PC is a choice of pragmatism, not passion. VR, detachable keyboards and other PC developments may not generate as much excitement as the iPhone X's abilities with augmented reality and portrait photography. But PCs aren't going away.

"PCs have become a replacement market, but, just like in automotive, that can be a pretty nice business," said Endpoint Technologies analyst Roger Kay. "People have realized that you can't do everything on a phone. I think the decline in PCs is mostly over."

Coughlin doesn't have Apple's colossal iPhone-fueled revenue and profits. But he needn't be ashamed. HP reported earnings of $696 million in its most recent quarter, with PC revenue up 12 percent and PC shipments up 7 percent.

More importantly, HP bumped Lenovo aside as the top PC company in the second quarter, according to analyst firm Gartner. HP's 21 percent share of the market narrowly edged Lenovo by one percentage point.

HP topped Lenovo in the second quarter of 2017 to become the top PC maker by selling 12.7 million PCs, analyst firm Gartner says.

Gartner; chart by Stephen Shankland/CNET

The following is an edited transcript of the conversation.

Q: Most ordinary people I've talked to don't really seem excited about PCs today. It's a steady-state market. PCs seem routine, not a shiny exciting toy.
Coughlin: I disagree. I would make the argument that actually, PCs are where the innovation is, which is why you're seeing the revenue growth in PCs. If you look at mobile devices, they've been declining three out of the four past quarters. Tablets are down 20 percent. It's not just HP. The category actually grew 3 percent this past quarter and has grown from a revenue standpoint for the last three quarters.

What do you think about the Surface line and Microsoft's aggressive push to compete with you directly?
Coughlin: I was in the room when [former Microsoft CEO] Steve Ballmer asked me, "Are you going to spend $500 million to create a Windows tablet category?" The answer was we don't have those kind of dollars. They went and created that category, and guess what? Our Spectre X2 is now scaling wonderfully. They created a detachable Windows category when it was all Apple's market. Their role is to be the tip of the spear.

Are there times where we might be competitive? Sure. But take their latest laptop with Windows S [an operating system version geared for schools, where Google's Chrome OS is also big]. Microsoft is trying to make sure they create a premium halo for Windows S. Is there enough market today there for us to spend our precious R&D resources? No. But they're doing it, and if there's a market there, then we participate.

Arguably no system is more personal than a phone right now. What's your latest thinking on actually selling one yourself? 
Coughlin: Our strategy is to include phones or tablets in our device-as-a-service offering. We will be the only one that can provide Apple, Android and Windows devices in one management contract. It's commercially focused. We have no plans to sell a consumer phone.

I use an iPad a lot at home. I have a keyboard on it. What's the division of labor between tablets and PC's?
Coughlin: The line is blurring. There are folks who want the tablet experience whether for airplane or other usage. There are others who wanted a thinner experience. We'll have the Spectre 13 -- thinner than an iPad Pro with a keyboard -- to provide for that. Then you have detachables [PCs whose keyboards and touch screens are separable]. You will see innovation from us that blurs that line even further. The standalone tablet business? The customer has spoken. If you do research with a current PC owner and a tablet owner, the current PC owner's desire for a refresh with another PC is twice that of a tablet owner's desire to refresh with another tablet. The future is more in these PCs and these PC hybrids.

Apple's newest MacBooks come with the Touch Bar above the keyboard but still don't have the touchscreens increasingly common on Windows PCs.
Coughlin: We are not brilliant enough to tell customers what they want. We listen to our customers, and customers say they want a touchscreen. There is no piece of research that will lead you to a Touch Bar. It feels to me like there is a dogma [at Apple] that says thou shalt not put touch in, and the Touch Bar was a way around that dogma.

Historically, focusing on more refined, profitable PCs means you lose market share. How did you gain with premium products and market share at the same time?
Coughlin: The mission is providing PCs for everyone, everywhere. We don't only do [high-end] Spectres. We also do $299 devices for schools or for folks who think that's the right device for them. Our rule is we have to provide customer value. We're not going to do a cheap $169 Chromebook that's going to crack.

Folks like [former Microsoft exec and now HP Vice President Mike Nash] have brought great product experience. Think about the Stream book -- the idea was to build a $199 PC. We were really careful to choose parts that delivered a great keyboard feel, great touchpad support. We also worked to include the right kind of software.

HP's high-end Spectre x360 laptop sports a hinge that lets the screen flip all the way around. HP brought the hinge to lower-end Pavilion laptops.

Stephen Shankland/CNET

And certain things that were introduced initially in the Spectre, like the double hinge from back in 2015, are in our [midrange] Pavilion today. It was a very high-end innovation two years ago. We perfected it, learned how to do it in a more cost-effective way.

We became No. 1 while we shifted toward premium PCs and gaming. For the last two years we've been taking share from Apple in premium. Three years ago we were nonexistent in gaming. Today we are a scale player. It's bringing millennials into the HP franchise.

Your PCs run Google's Chrome OS or Microsoft's Windows software. How disappointed are you that it's not your software? How much can you control of your PC business when such a fundamental part of the technology is out of your hands?
Coughlin: What we believe we can do is take the operating system, integrate it better and add our sprinkles of magic on top to create better experiences. We do not think of ourselves anymore as a commodity bundler of Microsoft and Intel technology. We're doing way too much on top, like Sure Start [a low-level security mechanism], Sure View [a tool to thwart peeping Toms] and video conferencing. We have no interest in getting into operating systems. It's not our core competence. But areas like security are where we can add value.

And where you'll see us morph is providing device as a service. We're able to manage PCs and mobile devices across Windows, Apple and Android. We're the only company bringing that together.

How much does a customer have to pay HP to supply and manage a PC through the device-as-a-service plan?
Coughlin: You go from a $69 a month up to $199 a month for something like a [high-end] workstation. It's a matter of shifting from capital expenditures versus operating expenditures. Companies want to put their IT resources against their future initiatives, not against managing legacy systems.

The HP Omen X VR backpack lets you bring the entire computer with you, battery power and all.

Sarah Tew/CNET

They also want to shift risk. We've doubled down on security this past year. We are very aggressive with the claim that we have the most manageable and secure PCs in the world. We have a product called Sure Click. Seventy percent of intrusions come through someone clicking malware. When you click on that link we containerize that so it doesn't infect the rest of your PC.

How big a business will virtual reality be -- a niche or something every kid does?
Coughlin: Today VR is a $7 billion market going to roughly $25 billion by 2022. It's going to scale slightly larger for consumers than commercial buyers. We think the commercial opportunity is where we can add more value.

At Case Western University, first-year medical students are taught anatomy on VR. Or let's take Roman history. A big textbook with a little picture of an aqueduct is not exactly emotionally involving. Now you put the VR headset on and you're in the aqueduct, you're seeing the chariots go through the Coliseum. Think about the learning efficacy of that. We're actively engaged with car companies for design and demos in showrooms, theme parks, military training. The training thing is a very big deal.

We announced several VR initiatives. We started with HTC Vive. Basically we were just a bundler, but that's a good start. Then we announced our partnership with Microsoft on their VR device. In the future we have some really exciting things happening.

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