YOU ARE HERE: LAT HomeCollections

The Ink Has Not Yet Dried in This Tale

Perennial rivals Dell and HP take stock after a year of cartridge-to-cartridge combat in the crucial and profitable printer market

June 20, 2004|Terril Yue Jones | Times Staff Writer

Could a machine that costs as little as $80 pose a serious threat to Silicon Valley stalwart Hewlett-Packard Co.?

Executives at computer powerhouse Dell Inc. certainly hope so. The company famous for selling low-cost, no-nonsense PCs has opened a new front in one of the high-tech industry's fiercest rivalries with its entry into the printer business.

Dell and HP already battle quarter by quarter for the title of world's top PC maker. The two have traded the No. 1 spot in each of the last three quarters, according to market research firm IDC. They also slug it out over server computers and storage systems for business, government and university clients.

Now Dell is attacking HP where it hurts the most: The printer business accounted for 74% of HP's operating profit last year. That means HP can't afford to give any ground there.

Dell's gains in printers are modest but, for HP, ominous.

The company sold 2 million Dell-branded printers in the 10 months after their March 2003 introduction. That was twice as many as planners had originally forecast.

What's more, sales of high-margin ink cartridges are 25% stronger than anticipated, and the printer and ink division is expected to take in $1 billion in revenue in just its second year of operation, to become Dell's fastest product ramp-up ever. Dell President Kevin Rollins said last week that he intended to cut prices for printers and ink significantly as the business continued to grow.

Dell's move into the $13-billion U.S. printer market was designed as a smart strategic decision leading to a steady profit stream, not as an assault on HP. But it's hardly a surprise that it would evolve into one. The rivalry between the two companies is intense.

An internal HP website with competitive information for its sales force was dubbed by employees the "Beat Dell site." Even HP Chief Executive Carly Fiorina does her part, needling Dell founder Michael Dell in public appearances. After Dell broke his ankle falling off a horse last fall, Fiorina capitalized on the injury during an industry conference by suggesting that his company would meet a similar fate if it tried to get into a complicated field known as grid computing.

Rollins, who will become Dell's chief executive next month, likes to point out that HP "hasn't made money in the PC space for a long time." In an interview with The Times last year, he took direct aim at the company's high-profile struggle to boost its profitability. "I don't care how global they are," he said. "The customers are not voting on behalf of HP in the current environment."

Merrill Lynch & Co. analyst Steven Milunovich, who met with Rollins this week, said in a report to investors Thursday that for Dell, "HP is enemy No. 1 in PCs, services, storage and of course printers."

Although Dell's nascent printer business is only a small fraction of the size of HP's, analysts say it poses a serious threat. In fact, HP's share of the U.S. printer market slipped to 46.9% in the first quarter this year from 50.4% a year earlier, according to IDC. In the same period, Dell built its market share to 9.1% from scratch.

HP's sales and earnings have been rising as the company digests its $19-billion acquisition of Compaq Computer Corp. But the printing and imaging group is the only one to post consistently strong results.

"Over time, Dell will have a negative effect on HP's bottom line, because HP's bottom line is built on the printer and ink business," said Bill Schaub, vice president of Techtel, a market research firm in Emeryville, Calif. "That printer business is going to be under attack."

HP Remains Confident

In many ways, HP would seem to hold the advantage. The Palo Alto company is bigger overall, with $73.1 billion in sales last fiscal year and net income of $2.54 billion. But Dell, based in Round Rock, Texas, is more profitable, earning $2.65 billion on sales of $41.4 billion.

Although HP's market share is shrinking, the overall U.S. market has been growing in terms of units, and the company brushes off the suggestion that Dell presents a threat. HP's printer revenue grew to $5.9 billion in the quarter that ended April 30, up from $5.5 billion in the same period a year earlier.

"There is no real impact on our profit," said Vyomesh Joshi, who heads HP's printer group.

HP says it turns out 1 million printers every week, easily trumping the 800,000 that Dell says it shipped in the entire last quarter. In addition, HP has amassed 9,000 patents covering printing and imaging technologies and adds about 1,000 new patents each year.

Dell's model is different. It doesn't spend money designing or manufacturing the printers; they are built by Lexmark International Inc. and stamped with the Dell logo. Dell sells them over the phone and the Internet, at prices ranging from $80 to $360, using its finely tuned distribution system to order and ship printers along with computers, TVs and other electronics.

Los Angeles Times Articles