The article below from NYTimes.com
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Very interesting story about the state of our industry.
John Lee
Vaske Computer Solutions
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The Distributor vs. the Innovator
May 24, 2004
By STEVE LOHR
"The biggest mistake I've made,'' confesses Michael S.
Dell, the 39-year-old founder and chief executive of the
fleet front-runner among personal computer makers, "was not
getting into printers sooner."
Lately, Dell Inc. has been making up for lost time. Since
it started selling Dell-branded printers a little over a
year ago, shipments have risen at an encouragingly rapid
pace. Mr. Dell predicts "tremendous growth" for his
company's computer printer business over the next 5 to 10
years and vows to change the economics of the industry.
Tomorrow, Dell plans to announce that it will begin selling
printers for the corporate and home market that it claims
will reduce the cost of some printing jobs by 30 percent or
more.
Such talk sets Carleton S. Fiorina, the 49-year-old chief
executive of the Hewlett-Packard Company, the powerhouse of
the printing business, on edge. She regards Dell's declared
ambitions as an irritating blend of hubris and hot air. Ms.
Fiorina notes that her company's printers and cartridges,
especially the inkjet printheads - clusters of nozzles,
each smaller than a human hair, spurting out millions of
superheated droplets a second - are the result of two
decades of sophisticated semiconductor and nanotechnology
research.
"Somebody doesn't just come along, particularly a company
that is not an innovator, and say, 'We're going to do it
better,' " Ms. Fiorina said. "Dell isn't doing anything.
It's just distributing other people's products."
The confrontation between Hewlett-Packard and Dell is more
than a particularly lively bout of competition in the $106
billion-a-year printing industry. It is a clash - and an
intriguing test case - of two different models of
innovation and corporate strategy.
With its engineering roots and its corporate tagline "HP
Invent," Hewlett-Packard is committed to spending heavily
on research and then funneling that home-grown technology
into new products. Those products, in turn, must be able to
command profits high enough to keep financing the corporate
invention machine. Hewlett-Packard's printing business is a
showcase of success for internal innovation. Dell, by
contrast, is pursuing a "virtual" research-and-development
model. It does some engineering development work itself,
but that typically amounts to tweaking an existing product.
Dell's main role is to scour the world for technology,
fine-tune the products of corporate partners, wring costs
from the supply chain and sell products directly to
customers.
There is plenty of technology being developed by companies
around the globe, Dell executives insist, but the
technology often lacks an efficient path to the
marketplace. And as it gets bigger and bigger, Dell is
becoming the Wal-Mart of high technology, a marketer so
powerful it can set product standards for its suppliers.
"This competition between Hewlett-Packard and Dell is a
collision of two rival models of innovation," said Henry
Chesbrough, executive director of the Center for Technology
Strategy and Management at the Haas School of Business at
the University of California, Berkeley.
Today, Dell is an upstart in computer printing compared
with Hewlett-Packard. Dell sold an estimated 1.5 million
printers in its first nine months in the business last
year. This year, analysts estimate that Dell will sell 4
million printers or more. Its revenues from printers and
ink cartridges have already blown past the $1
billion-a-year threshold, the fastest takeoff ever for Dell
in a new product category.
Yet the printing group at Hewlett-Packard reported nearly
$23 billion in revenue last year. It sold 43.6 million
printers, more than double its nearest rival, Epson,
reports IDC, a research firm. The business is big and
immensely profitable: it accounted for about 30 percent of
Hewlett-Packard's sales last year, but 80 percent of its
earnings.
The Dell strategy is obvious: build a printer business,
attack Hewlett-Packard's crown jewel and, thus, hobble its
principal rival. And Hewlett-Packard is trying to return
the favor by cutting prices aggressively on PC's with the
goal of grabbing sales in the corporate PC market, which is
Dell's stronghold.
Hewlett-Packard invests $1 billion a year in research and
development for its printer division, and that spending is
on display at its laboratory in San Diego. Jars and
canisters of experimental ink rest alongside the
chromatographs, the scanning tunnel microscopes and the
thermotron environmental chambers. Anything that is not
patented - Hewlett-Packard's printing group holds 9,000 -
is protected by trade secrets.
Every day, physicists, chemists and fluid-mechanics
engineers puzzle over ways to make the symphony of
nanoscale ink explosions more efficient and precise. They
speak of co-solvents, surfactants, polymers, humectants,
friction coefficients and tailhooking (when the trailing
tail of a misfired droplet splats wildly).
The hundreds of nozzles crammed onto the slender silicon
face of the printhead march to the nanosecond beat of an
integrated circuit inside the cartridge. Yet the hardware
of the cartridge is only half the story. The "software" of
this technology is the ink. Hewlett-Packard has more than
100 different ink formulations on the market. Three years
or more of research, development and testing go into each
ink variety.
Since its commercial introduction two decades ago, the
inkjet printer has improved at a pace equal to Moore's Law
in semiconductors - its performance doubling every 18
months. Hewlett-Packard printheads, with up to 500 nozzles,
put ink on paper at the rate of 18 million droplets a
second, and its labs are on track to reach 1 billion tiny
drops a second before 2010. Many other companies, including
Canon, Epson and Lexmark (Dell's partner and main
supplier), make inkjet printers today, but Hewlett-Packard,
the early pioneer, is still the technology leader, most
analysts agree.
Digital photography is a challenge for inkjet printing, but
also a showcase for superior technology. And printing
digital photos looms as a huge growth opportunity for the
printer industry, with as many as 50 billion digital photos
taken last year, a number that is projected to increase
steadily over the next several years. A small fraction of
digital photos are printed, but Hewlett holds 50 percent of
the market for those printed at home.
The really good news for the printer industry, though, is
that a digital photo is an ink-eating glutton. And the ink
is where the money is in printing - a classic razor and
razor blade business. The manufacturers lose money on the
standard home printer, but make hefty profits on all the
replacement ink cartridges people buy.
"Digital photo printing is a trend that H-P is leading, and
it is our single biggest growth opportunity," said Vyomesh
Joshi, the executive vice president in charge of
Hewlett-Packard's imaging and printing group.
Mr. Joshi sees promising growth opportunities in other
markets besides digital photos. These include color laser
printers, as businesses increasingly want color for
presentations and marketing materials, and fast
multipurpose machines for corporations that combine
printing, copying and scanning, which cost up to $45,000
each.
"I want to add $2 billion every year in revenues," he said.
So far, so good. Hewlett-Packard's printer group indeed
added $2 billion in revenues last year and shows no signs
of faltering this year. It is too early to tell for sure,
analysts say, but Dell's initial success in the printer
business seems to have come at the expense of others rather
than Hewlett.
Dell, according to Mr. Joshi, can sell several million
printers, exploiting its strength in the PC business, and
still not pose a fundamental challenge to Hewlett-Packard
and its profitability. The reason is simple, he said: "We
own the core technology."
A central issue for Dell in printing is how easily it can
get its hands on technology that is comparable or nearly
comparable to Hewlett-Packard's. Dell says there is plenty
of powerful printing technology out there, and that its
goal is to work with suppliers and use its efficient
distribution system to lower the cost of printer
cartridges.
Over time, Dell contends it can drive down the cost of
printing by 25 percent to 35 percent a page. Shave a third
off the cost of a standard color inkjet cartridge for a
home printer, now typically $29.95, and the price tag would
fall to $19.95.
Its lack of a large internal research program, Dell says,
is actually an advantage. "Your reach can be extended
enormously if you reach beyond your own backyard," said Tim
Peters, vice president and general manager of Dell's
imaging and printing business. Dell's first partner was
Lexmark, the third-largest maker of inkjet printers after
Hewlett-Packard and Epson. Earlier this year, Dell
announced three more partners: Samsung, Fuji Xerox and
Kodak. Analysts say Samsung and Fuji Xerox are strong in
office laser printers, while Kodak has some intriguing
digital photo printing technology.
Hewlett-Packard is in theory most vulnerable in laser
printers, the workhorse of office printing, because it
relies on an outside technology provider. Canon supplies
the mechanical engine for Hewlett-Packard laser printers
and the toner cartridges.
The technology inside a laser printer - durable, high-speed
machines typically used in offices - is very different from
that of inkjet printing. In laser printing, a tiny laser,
making 3,000 rotations a second, zaps electrical charges on
a photo-conducting roller. The toner - finely crushed bits
of plastic; five equal the width of a human hair - is then
picked up by the charged portions of the roller and
deposited on a sheet of paper. Finally, a second, heated
roller irons the toner onto the paper.
Hewlett-Packard designs the microprocessor that controls
the laser's minute, manic dance, and it also develops
software and handles testing and industrial design for its
laser printers. Laser machines and cartridges represent
about a third of the profits from the company's printing
business, analysts estimate.
There is also the rising challenge of the remanufacturers,
who collect used printer cartridges that they then clean,
refurbish and refill. The remanufacturers sell cartridges
for roughly 25 percent less than new ones from
Hewlett-Packard. The quality of remanufactured cartridges,
analysts say, has improved in recent years.
Four years ago a trade association, the International
Imaging Technology Council, was established to develop
standards for the remanufacturers. The refurbishers now
account for nearly 30 percent of the laser toner cartridge
market.
Dell has turned heads with the brisk sales of its printers
- rebranded Lexmark machines with a few clever features,
like the equivalent of an ink-cartridge gas gauge that
alerts the user when ink is running low and links to the
Dell Web site for reordering.
But it has not yet changed the economics of the printing
business. In fact, according to Jim Forrester, managing
editor of The Hard Copy Supplies Journal, Hewlett-Packard's
cost per page is less than Dell's.
Things are just beginning, Mr. Dell replies. "Stay tuned;
there's a lot we can and will do," he said. A better
business model, he explains, will beat a better technology,
and he insists the odds are on his side in the printing
business over the long run.
"The days of engineering-led technology companies are
coming to an end," Mr. Dell declared.
For her part, Ms. Fiorina will take that bet. "We're the
biggest,'' she said. "We're the best, and we're getting
better in a growing market."
http://www.nytimes.com/2004/05/24/business/24print.html?ex=1086420593&ei=1&en=4a426c8d57741d6a
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