HP “Medals” In U.S. PC Olympics

Introduction

Hewlett Packard [NYSE:HWP] and Gateway [NYSE:GTW] have both become consumer driven PC businesses. However, when IBM [NYSE:IBM] chose to exit the retail market, HP was poised to take over - since an HP Pavilion was usually already one shelf over at CompUSA or Best Buy. (For a broader overview of the market, please see TEC's article Desktop PC's: Meet the New Boss.)

Gateway and HP have tracked general PC system growth in the U.S. for the past two years. We expect Gateway to continue to perform on par with market trends. However, with IBM out of the retail market, HP is outperforming the rest of the market. While the US market is growing at 15%, HP is growing at an astronomical 38%. We expect this trend to continue throughout 2000 (80% likelihood).

Figure 1

Source: TEC [Note: 2000 figures are TEC forecasts.]

Hewlett Packard

While Gateway has been a pioneer in direct sales, HP has relied on a worldwide army of resellers and VARs. Although HP would love to develop its direct sale capability (who wouldn't?) its growth surge is being led by the retail sector.

HP is in a good place. They've had explosive consumer growth already this year, while their new business offerings, led by the e-Vectra, are just hitting the market.

HP's U.S. sales are on track to reach 5.4 Million units in 2000 - up almost 1.5 million from 1999. It's still shy of market leaders Dell [NYSE:DELL] & Compaq [NYSE:CPQ] (9.8 & 8.6 million, respectively). But reaching #2 is U.S. sales is no longer impossible.

U.S. Sales, Annual

User Impact

Lately, HP's been slipping some in the minds of business systems buyers. HP needs to draw attention to its deep technical advantages via aggressive marketing to avoid becoming an also-ran - in the minds of buyers, service providers, and software vendors.

Battletested in the price wars of the retail market, HP has the potential to offer the business user a winning mix of low price and technical superiority.

Gateway

Gateway takes the lead in direct sales over HP - it's bested only by Dell Computer Corporation. Gateway has little in the way of R&D. Gateway does have a retail presence, but its retail sales take place in the company's own chain of 200 Gateway Country stores in the U.S.

Gateway's sales strategy is simple. It targets the consumer, but doesn't mind picking up business sales along the way. In 1999, 48% of Gateway's sales were to consumers, while 37% were to businesses.

Gateway is no slouch in the market - its U.S. growth rate, currently 21%, outperforms the overall U.S. desktop market (currently growing at 15% annually.) And for Gateway, consumers are the jet engines of growth - consumer growth was 25% at 1999 at Gateway, while business growth was only 5%. Gateway is on track to ship 4.8 million systems in the U.S. during 2000.

Later in 2000, Gateway will be introducing a line of Linux-based Internet appliances, jointly developed with AOL. This will be an interesting project - especially the Linux desktop appliance PC - but it doesn't do much for the high-potential business market.

Gateway's entry-level Astro is priced higher than Dell's similar consumer offering. This sub market - consumer appliance PCs - will heat up as we see new products derived from Compaq's iPaq and HP's e-Vectra. The Astro needs to stay price and feature competitive.

User Impact

Gateway can't grow much faster in the U.S. consumer market, so expect them to hunger more for business users and overseas markets. If you're a U.S.-based business with a Gateway Country store down the street and a couple of sales offices in Asia & Europe, Gateway would love to talk you. Press for price advantages and local service offerings.

BOTTOM LINE
Conclusions

In Robert Frost's "The Road Not Taken", the poem ends with the famous "two roads diverged" metaphor. In the poem, they never meet again. However, in the PC marketplace, Hewlett Packard and Gateway have taken radically different roads to arrive at the same place - the consumer market.

Gateway has an asset no other major PC vendor has - its network of Gateway Country stores. Gateway needs to develop and extend its build-to-order, sales & service from this unique resource.

HP is traditionally known as a full-service, engineering-oriented company. Its current consumer growth is phenomenal, but it's coming in a lower margin part of its business. HP should leverage its consumer success and brand awareness to more aggressive marketing and development for its business systems. HP also needs to stay price-aware in the fickle retail markets.