HP Ups The Ante In Printer Market By Going 'Scalable'

Investor's Business Daily
Monday July 3, 7:00 pm ET
Ken Spencer Brown

Since taking over Hewlett-Packard's printer group in 2001, Vyomesh Joshi has been on an enviable winning streak.

In his 51/2 years at the helm, he's reversed market-share losses, beefed up gross margins and turned the ho-hum technology into an out-and-out cash machine.

Though it brings in less than a third of HP's (NYSE:HPQ - News) overall sales, the printer unit generates more than half of the tech giant's profit.

Now the company is moving to a technology it calls scalable printing. By making print heads from a single piece of silicon, its printers will be capable of sharper pictures and faster prints. Scalable printing will also serve as a platform for a range of products, giving HP a low-cost entry into new markets. (See related stories, A1 and this page.)

But will it make HP unstoppable?

Not necessarily, say analysts and rivals. While the technology is a definite plus for HP, it's not -- by itself -- a knockout punch.

"Nothing we have seen has surprised us," said Marty Canning, who overseas sales to big businesses at rival Lexmark (NYSE:LXK - News). "And we're pretty pleased with the technology direction we're focused on."

He wouldn't say what Lexmark is working on, but says HP's launch doesn't change the landscape.

HP is pushing hard into Lexmark's stronghold of business customers, even wooing away Bruce Dahlgren, who until January headed up Lexmark's North American printing and services unit.

That hire has sparked a lawsuit from Lexmark, which is trying to enforce a noncompete clause in Dahlgren's employment contract. A countersuit from HP contends that such agreements are powerless in California, where Dahlgren is set to work.

Lexmark Owns Technology

Neither company would comment on the suit, but Canning shrugs off HP's recent moves.

Unlike HP, Canning says, Lexmark owns all of its underlying technology. HP licenses its laser printing technology from Japanese rival Canon (NYSE:CAJ - News) under a longtime pact.

That gives Lexmark an edge in customizing the technology for novel devices, Canning contends.

Case in point: Lexmark's drug-label printers, which have been a hit in pharmacies, required tinkering at the deepest levels of the firm's labs. "Imagine getting your product sourced across the ocean from somebody else's development organization," he said. "It's just not feasible to think you could drive those types of requirements from any partner."

Still, HP has the resources to out-spend Lexmark and most other printer companies. HP has invested $1.4 billion on scalable printing alone over the last five years.

Compare that with the total research and development budgets of Lexmark ($336 million) and Seiko Epson ($391 million). In both of those cases, that money has to cover several different product categories, not just inkjets.

If HP faces a challenge in the market, it's most likely to come from Canon, says Jim Forrest, an analyst with Lyra Research. He says Canon is the only printer maker with the money and heft to match HP's efforts. Like HP, Canon makes cameras -- most of which sell well and garner high praise from critics.

Canon also has a technology similar to HP's scalable printing. Full-photolithography inkjet nozzle engineering, or FINE for short, also involves building entire print heads from silicon like a chip. That makes for faster, sharper prints.

So it's not as if HP has a monopoly on the concept, Forrest says. Scalable printing "isn't unique," he said.

In fact, Canon launched its technology seven years ago. That's a sizeable head start in the high-tech field, and it shows. Canon's printers boast a 9,600 dots-per-inch resolution vs. HP's 4,800.

Canon Doubts Claims

HP engineers say their scalable printing is capable of producing 9,600 dpi resolution, a claim Canon officials question.

"If they could, they would," said Michael Duffett, who heads Canon's printer marketing.

Still, Duffett is hardly writing off HP. He expects the printer market to boil down to a two-race race between the two companies. Like HP, Canon has gained market share in recent months, especially in fast-growing segments such as all-in-one printers with built-in scanning.

But it still has a long way to go. Its market share hovers around 5%, a tenth of HP's.

Canon hasn't pushed its scalable technology as heavily as HP into new markets. But all of the Japanese firm's inkjet-based products use the technology vs. only a few of HP's models.

It's not clear how well the technology will perform when it's sold more widely. Unlike today's printer cartridges, which are used once and discarded, the new print heads will have to last the life of the printer.

Another big question mark: what scalable printing will do to HP's lucrative inkjet business.

The firm has always had to deal with off-brand ink sellers -- along with services that refill used cartridges at a fraction of the price of new ones.

With current printing technology -- in which the print head and ink tank are sold as a single unit -- challengers face a natural barrier to entry. Cartridges are hard to copy, and used ones last only so long.

With scalable printing, users replace only the ink tank. It's much easier to copy "dumb tanks," as Forrest calls them, than the more complex cartridges HP sells now.

HP plans to ramp up marketing to convince users to stick with HP's inks -- rather than generic competitors. It could be forced to lower ink prices to hang on to customers.

According to Forrest, Canon and Epson lose up to half of their dumb-tank printer users to off-brand ink sellers vs. 15% to 20% for HP and Lexmark.

Canon has fought back with lower prices. Epson, meanwhile, has sued aftermarket sellers.

HP executives say they won't try to lock in customers to the firm's ink, but it has sued outside ink makers for breaching its ink patents.

"I don't think (scalable printing) fundamentally changes the ink business model," said Tuan Tran, who heads marketing for HP's printer supplies. "Our ink formulations and printers are designed to work together. Others are just not going to deliver."