A MARINE geologist would have no problem grasping one of the main mechanisms of the information technology (IT) industry: after new technology is introduced, it sinks, often quite quickly, to the bottom of the IT ocean and becomes part of its sediment—commodities that are well understood, easily copied and hence not very profitable. This is why IT firms are always trying to move “up the stack”, reducing their dependence on hardware and pushing up into software and services, where margins are higher.

These opposing movements help to understand why Hewlett-Packard, the world's biggest computer-maker, announced on Thursday, August 18th, that it plans to sell its personal computer business, stop making smartphones and computing tablets based on the firm's webOS operating system and buy Autonomy, Britain's biggest software firm, for $10.3 billion.

PCs are still HP's biggest business, with $9.6 billion in revenues in the past quarter. No other firm sells more desktop and laptop computers—about 64m last year, 18.5% of the global market. But with an operating margin of 5.9% it is only half as profitable as HP's other businesses. And this is unlikely to change. “The tablet effect is real”, Léo Apotheker, the firm's boss, said in a conference call, referring to the fact that consumers are increasingly buying tablets instead of PCs. HP's board has thus asked him to “examine all possible options” for what to do with the “personal systems group”, which sells mainly PCs. This essentially means that HP has put up a “for sale” sign over it.

Palmed off

It was only in April 2010 that HP bought Palm for $1.2 billion in an attempt to enter the lucrative business for mobile devices. Palm's smartphones were selling poorly, but its webOS software was widely acclaimed. The idea behind the deal was to turn Palm into a leading seller of tablets. But sales of HP's TouchPad, which was launched to great fanfare in July, have been dismal, mainly because of problems with the hardware, and the lack of applications compared with Apple's iPad. Continuing to sell its own mobile devices “was no longer in the interest of HP and its shareholders”, in the words of Mr Apotheker. To put it more bluntly, the business was hemorrhaging cash and would have continued to do so. Closing down the devices unit means that only webOS will be left of the Palm business. HP will try to get other hardware firms to license webOS, or will sell it off too.

The acquisition of Autonomy is a much bolder attempt to take HP into higher-margin territory. And a dear one: HP is paying the equivalent of 15% of its own current market capitalisation for a revenue increase of 1%, as Toni Sacconaghi of BernsteinResearch pointed out during the conference call with Mr Apotheker. But Autonomy is the market leader in software to sift through “unstructured” data, such as documents, e-mails, photographs and phone calls. The quantity of such data has exploded: more than 80% of a typical company's information is now unstructured, according to some estimates. Firms that can extract meaning from this digital pile have a big advantage, which is why Autonomy has done well despite the economic crisis. In the past five years the British firm has increased its revenues on average by 55% a year (although this includes acquisitions, of which Autonomy has made many).

The IBM way

These radical moves will push HP in the right direction—one that IBM took some time ago. The new HP will be much less of a company selling gear to consumers than one building IT systems for companies and helping them manage their growing pile of digital information. This transformation will take time. Mr Apotheker, who also reported less-than-brilliant quarterly results during the conference call, asked for patience. “This is a multi-quarter effort”, he said. The big question is whether the markets will give him that time. No doubt there are corporate raiders who would love to take over HP and carve it up their own way.

Read on: With Google's takeover of Motorola, the battle in the mobile industry takes an unexpected turn