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HP sharpens dual-brand PC focus

Hewlett-Packard wants to use its two PC brands as a weapon, with Compaq aimed at Dell and the HP line taking on Sony and Apple.

Now that it has managed to keep both Compaq Computer and Hewlett-Packard PCs on store shelves, HP wants to make sure they stand out more from each other.

The company also wants to use the two brands to go after two distinct segments of the market, with HP attacking the high-end and the Compaq brand designed to compete on price and on bang for the buck.

"One is going after Sony and Apple (Computer), and the other is going after Dell (Computer)," said Jim McDonnell, vice president of marketing in the personal systems group at HP.

The outlines of that strategy started to take shape shortly after the merger was completed last May. The company positioned HP as its premium line, focused on multimedia, and said Compaq would be more of the value line. However, the product lines have retained a fair measure of similarity thus far.

"You will start seeing the products actually start changing in the spring with more differentiation," McDonnell said.

One form that will take is more HP-branded systems using Microsoft's Windows XP Media Center operating system. Those systems, which can record TV programs like a TiVo box and display digital photos on a television, have been doing well by most accounts, but make up only a small fraction of total consumer PC sales.

By this time next year, though, such systems could make up 10 percent to 20 percent of consumer PC sales, McDonnell said. "That helps us not only with selling Media Center PCs, but also in an overall halo" for the HP brand.

HP has said it sold as many Media Centers as it made during the first quarter, but hasn't said how many that was. Stephen Baker, who covers the retail PC market for NPDTechworld, said such machines made up only a small single-digit percentage of retail sales, as prices remained high. However, Baker said sales could pick up as lower-cost models hit the market as prices fall for the components needed to make a Media Center PC.

In addition to the special version of Microsoft's operating system, such machines also need large hard drives, powerful standalone graphics cards and, ideally, a DVD burner, Baker said.

In coming months, HP plans to introduce several new models, including lower-cost desktops as well as its first laptops with the Media Center features.

HP also is stepping up the inclusion of drives across its product line that can burn DVDs, a strategy that has worked for the company in the past. HP's ascendance in the PC business was attributed in large part to its quick adoption of CD burners in its PC line.

"By the end of this year (DVDs are) going to be pretty ubiquitous," McDonnell said.

Even without clear differentiation, HP has managed to hold much of the space on retail shelves that the two companies had separately, Baker said.

"We haven't seen the loss we thought we might, where some retailers might decide to use one (brand) or the other," Baker said. Last fall, Baker said that Compaq's Presario line seemed to be struggling to hold on, but he said the latest models seem to be reversing that trend.

PC profits could be temporary
In making its PC division id="985969">profitable last quarter, HP achieved one of its key strategic goals for the year: profitability in both its PC and high-end computing businesses. However, those profits may prove hard to sustain in the short term.

After posting a narrow $33 million operating profit in the quarter that includes the end of the holiday buying season, HP now finds itself in the slowest time of the year for PCs, its second fiscal quarter.

"After that quarter it starts building again," McDonnell said.

HP also has seen its sales shrink substantially over the past year, with sales in the just-reported quarter totaling $5.1 billion, down from $6.3 billion a year earlier, but up 2 percent from the prior quarter.

In interviews this week, neither McDonnell nor Chief Financial Officer Bob Wayman would commit to predicting profitability for the PC unit this quarter.

Even the PC profit that HP posted Tuesday is somewhat suspect, said Bear Stearns analyst Andrew Neff. The company shifted some expenses, including some research and development costs, from its various business units and into a separate corporate area.

Neff estimates that the move may have allowed HP to shift as much as $40 million a quarter out of its personal systems unit. Keeping those costs in the PC unit might have meant that the $33 million operating profit would have actually resulted in a loss, Neff said.

HP took issue with Neff's calculations, saying that even had the company not made the accounting change, the PC unit would have posted a profit. "By old definition or new definition, our PC business is profitable--no if's and's or but's," HP spokeswoman Rebeca Robboy told CNET

Neff took note of HP's claim Wednesday, but said that the accounting change still served to boost the profitability of the PC unit in the just-reported quarter. Neff also said the new method will make it easier for HP's business units to show operating profits in future quarters as well as making it "more difficult to assess profitability of the business segments relative to HP's original projections."

HP would not say exactly how profitable the PC business would have been had the company not changed its book-keeping method, but Neff said HP indicated it was greater than $10 million.