October 28, 2002 4:00 AM PST

HP pressing for more printer business

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Hewlett-Packard's printing division doesn't have a license to print money, but it may as well have.

Learn more about HP
The division's printers, paper, toner, ink and other supplies account for the bulk of the tech giant's profits. But that well is not necessarily bottomless, and to keep the black ink flowing, the division--and HP as a whole--are aggressively targeting new customers and expanding product lines.

The effort is crucial to Hewlett-Packard's prospects, say analysts.

"They've got to add some new market segments if they intend to maintain anywhere near the growth they've had for the past 10 years," said Bill Gott, a printer analyst and editor of Printer Market Monitor.

How crucial is printing to HP? For the first nine months of the year, the division accounted for 27 percent of the company's $54 billion in revenue. The division also posted an operating profit of $2.3 billion, while the rest of HP posted a small combined operating loss.

Well aware that printing is paramount, HP has made several bets on the next growth areas. The largest of those is its $700 million acquisition of Indigo, announced just two days after HP's blockbuster plan to buy Compaq Computer last year. Although the Compaq deal provoked an epic eight-month proxy fight and monopolized the headlines, it's the Indigo acquisition that is now entering the spotlight.

Vyomesh Joshi, head of HP's printing business, said his goal is to continue to grow sales at 10 percent a year, meaning he has to find a way to generate an extra $2 billion each year. That's no easy task. But there are possibilities out there, Joshi said in an interview. Of the 18 trillion pages printed each year, only 4 percent are done by the types of printers made by HP. "Ninety-six percent is our opportunity."

The next couple of years' growth could come from continued gains in the low-end printer market and by attacking some of the market for digital copiers, Joshi said. He's also counting on all-new areas, like the Indigo technology, to start fueling the growth by 2005.

With Indigo, HP is targeting the printing press. Indigo offers the same high quality as traditional offset printing but without the costs. Offset printing requires expensive plates to be made for each job. Indigo machines, on the other hand, combine elements of laser printing, inkjet printing and the printing press and offer much lower setup costs. That could make them the preferred choice for smaller print jobs.

"Printing (quantities) below 500 or 1,000 on an offset press is not very attractive," said Eric Hanson, a department manager with HP Labs.

But it's a long-term bet. So far only about 2,000 of the machines--which cost anywhere from $200,000 to more than $1 million apiece--have been sold.

Still, HP has broader plans for Indigo's technology, which could make the wait that much more tolerable. HP is aiming at customized print jobs, in which each item is targeted to the individual receiving it. Indigo's technology could also be beneficial when it comes to the market for printing photographs.

The market for customized print jobs is almost nonexistent today, but the photo market accounts for some $75 billion in revenue each year--though it's still dominated by traditional chemical photo development. However, because Indigo machines use a relatively small amount of ink at very fine resolution, they produce very good results when printing photographs on glossy photo paper.

The competition
HP is not alone in its effort to sell a device that combines features of a printer with those of a printing press. NexPress, a joint venture of Kodak and German printing press giant Heidelberg, is also in the game. And Xerox, too, has spent a reported $1 billion developing its iGen3 digital printing press.

But no one has a significant head start; it's still early for all the new digital entrants. Xerox is just now selling its iGen3 in a few key markets, while NexPress said in April that it has sold only about 150 presses, with plans to have sold "hundreds" by the end of this year.

Joshi points out that HP is benefiting from Indigo's experience and is studying what is working for companies such as San Jose, Calif.-based Image Corp., a silicon print shop that has been using an Indigo machine for more than three years and has been profitable the entire time, according to CEO Don Watson.

Watson said his first customers had print runs too small to be economical on a traditional offset press.

"If a customer only wanted 300 or 500...brochures for a specific event, they saw the Indigo as an option they'd never had before," Watson said.

But despite some key advantages, HP faces a number of hurdles.

First off, it's a new area for HP, with a new base of customers. While HP's large-format printers and plotters have been used by "pay for print" shops, Indigo's main customers are old-fashioned print shops, which tend to be small- and medium-size businesses.

Plus, workers in print shops are technically skilled, but in a far different area.

"It poses more of a technical challenge to the shop that buys it," said Gott of Printer Market Monitor. "They have to come up to speed in the computer world, which they might not have done before."

Another challenge is that Indigo's machines are very labor intensive. That's one of the reasons chain copy shops have declined to install them.

"I don't think they employ people at that skill level," HP Labs' Hanson said. "This shouldn't have to be limited to a print shop."

Image Corp.'s Watson said running the Indigo does require somewhat different experience than traditional printing. While the machines don't need an experienced press operator, Watson said, they do need someone "more mechanically inclined and computer literate" than his typical worker.

HP is not the only one struggling with that issue. Xerox, for example, sends a representative with its iGen3 machines, not just to operate and maintain the machine, but also to sell customers on the idea.

"You don't have someone buy a $500,000 digital printer and not make any money," said IDC analyst Riley McNulty. "That's the last thing you want.?

Joshi agrees, saying that in addition to selling machines to print shops, HP has to make sure enough big companies know about the machines so that the print shops themselves can make money.

HP is also working to make sure future generations of products using the Indigo technology operate more like the company's other printers, with much of the decision-making handled through software.

Serving documents
Other company initiatives include a specialized server that could help create custom publications for smaller operations--basically allowing a PowerPoint presentation to be professionally put together minutes before a meeting and customized for each person in the room.

HP Labs is working on the machine, which will be built from standard PC components and contain special software that would automate the processes behind printing booklets, catalogs or digital photo albums--such as converting images and text into PDF files.

Information technology managers could slide the servers into an ordinary rack, similar to the kinds of specialized server appliances already on the market that are dedicated to tasks such as encryption, e-mail or Web searches.

"We're trying to take all of the nits and grits out of publishing and put it into a box," said HP's Sang. Publishing "is an art, but we should be moving away from that...You shouldn't have to know how to use Illustrator and Photoshop."

Ideally, these servers would let sales teams graduate from handouts printed from PowerPoint slides. In a demonstration, Sang selected text, artwork and several slides from a drop-down menu. Minutes later, an 8.5-by-11, two-staple color booklet was completed.

Publishing servers would also let companies customize booklets on the fly and delay print jobs until the last minute. Although Sang said such documents are likely to be processed on a color laser printer, such an approach could also be handled more professionally when used with an in-house Indigo press. Currently, these types of print jobs have to be outsourced, or left to an art department.

Sang said it is unclear when or how HP might bring such a product to market. "The hardware is there, and some of the (software) technology is there. We're still working on the go-to-market strategy," he said.

From books to bits
Hewlett-Packard is also probing opportunities in document preservation. In one massive project, HP digitized the entire MIT Press catalog, a collection of publications that stretches back to the 1940s.

The university, the fourth largest academic publisher, wanted to sell out-of-print books and reduce the burden of warehousing old textbooks, said John Burns, another researcher in HP's labs.

Although ostensibly a high-tech project, most of the expense involved scanning pages. The volumes were sent to Lason, a scanning services company. Workers in Mexico and Barbados were employed to cut out and scan each page, which took about a minute per page. In all, about 1.5 million pages from 2,200 books were digitized at a cost of about 30 cents a page, said Burns.

Once the pages existed in electronic form, HP channeled the results through a workflow system, 18 computers and a storage unit. Some of the chief challenges involved devising algorithms to ensure that pages of the physical book corresponded to those of the electronic versions. Faulty scans, unusual chapter conventions and blank pages separating chapters often threw off the process.

"You can't possibly have a person look at every page," said Burns.

Because books now get published and stored electronically, there is likely a finite limit to the need for such services. Still, the number of analog documents is staggering. The 2,200 books of the MIT collection took 2.5 months to process. The Library of Congress contains 20 million books. That's a lot of billing hours. And not all publishers have gone digital.

"Even today there are publishers that don't keep electronic copies," Burns said. "We've had lots of interest from (other) universities."

Coffee, tea and pages 1 through 3
Another growth area for HP is finding new ways for travelers to print their documents. HP already has two printers with short-range Bluetooth wireless connectivity built-in, allowing people to print e-mail and attachments from their cell phone or handheld, for example.

The goal now, Joshi said, is getting those printers, as well as ones with longer range Wi-Fi connections, in public places, such as hotels, coffee shops and airports.

One area to watch is HP's existing partnership with Starbucks and T-Mobile, which involves providing wireless Internet access at the coffee chain's outlets. Joshi said a natural extension of that deal would be for HP to offer printing. "That's the next step," he said.

HP's research found that about two-thirds of people with mobile devices would like to print out some of the data they are carrying with them. The company estimates that it could get people to print 40 to 60 more pages a month if it had printers in the right places.

 

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