November 11, 2003 1:37 PM PST

With copiers, can HP print unit duplicate its success?

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For Hewlett-Packard, expanding from selling printers to copy machines has proven more difficult than simply announcing its plans and pressing the green button.

For the past couple years, HP has been intent on moving its printing business beyond computers and into the realm traditionally ruled by companies such as Canon, Ricoh and Xerox. The push is part of a strategy designed to let HP's huge printer unit continue its strong revenue growth. The company plans to announce its latest update to the strategy, along with new products, at the Comdex trade show later this month.

"We want to go from desktop to print shop," imaging and printing boss Vyomesh Joshi is fond of saying, while pointing out that computer-generated prints make up only about 4 percent of all printed pages. But despite months of talk from HP about how it's ready to take on the other 96 percent, the company has come to realize it's not yet where it needs to be.

News.context

What's new:
At Comdex, HP will discuss new moves to ensure that its "crown jewel"--the printer division--can continue to thrive. A push into copiers has been a big part of the strategy.

Bottom line:
The company's ongoing move into copy machines shows promise, but it hasn't been a slam dunk. In addition to churning out new devices, HP has to tweak its selling strategy and learn to work with facilities departments as opposed to the IT crowd. And those aren't the only obstacles.

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Expanding the printing business is critical for HP--the unit has long been the "crown jewel" of the company, accounting for the vast majority of overall profits in recent years. Although, following the absorption of Compaq Computer 18 months ago, HP has improved the financial outlook of its computing business, the printer business is at least as important to the company's bottom line as it was before the merger.

And while HP's printer business is robust, the overall printer market is seeing slower growth, said Bill Gott, a printer analyst and editor of Printer Market Monitor, an industry newsletter.

"Some segments are even declining," Gott said. "In order for HP to keep up the fairly high double-digit growth rate they've enjoyed, they've got to engage in some new markets."

For HP, the most enticing segment to attack has been the $18 billion worth of pages printed on copy machines each year. A printer combined with a scanner offers a number of selling points over a traditional copier. For one thing, such a device is less likely to break down, typically having 1,000 moving parts, compared with the 10,000 parts found in many copiers, Joshi said.

But despite reliability and other advantages, HP's printers just haven't been fast enough to compete beyond the bottom reaches of the copier market.

"We have obvious gaps in our product portfolio," Joshi conceded in a question-and-answer session at this fall's Seybold seminar.

One of the largest of those gaps is at the high end of the multifunction peripherals market--that is, very fast machines capable of printing, scanning and copying documents. That area is currently a battleground between printer makers like HP and Lexmark as well as copier vendors such as Ricoh and Xerox. Although such machines don't sell in vast numbers, they handle large workloads, creating a substantial market for services and supplies.

HP has made great strides with multifunction peripherals since its ill-regarded "Mopier" product family some years back, but its products do not yet span to the upper reaches of the market. The company's current product portfolio tops out with a line of Multifunction LaserJets that sell for around $15,000 and can print 50 pages per minute. That's fast enough for workgroups but not the kind of speed required for a large department or a companywide print shop.

Power to the printers
Recognizing its weakness in the high end of the copier market, HP sought out a partner that could deliver more-powerful print engines. In August, HP signed a deal with Konica to use Konica's copier engines in HP's gear. At the time, the two companies did not talk specifics, but HP is expected to announce the first fruits of that agreement later this month, with analysts expecting products that reach into the 50 to 80 pages-per-minute range.

If HP is going to tackle the upper end of the copier market, though, it will need more than faster gear. It'll have to sell its devices in the same way copiers are sold today. In some cases, that means hawking to the facilities department rather than the information technology crowd, with which it's more familiar.

While printers and toner are typically purchased by a company, copiers are often leased as part of a monthly package that includes service and supplies, with perhaps a per-page fee for each "click" above a certain level. Though HP has a large number of printer resellers selling its multifunction devices, it has little support from the office product dealers who specialize in selling copiers.

"They've chosen to market them as expandable printers rather than as copiers," Gott said

However, HP has been recruiting office product dealers and is expected to announce results in that area soon.

"They are pointing their guns at the copier vendors," said Gartner analyst Peter Grant, who said HP comes into the battle with a lot going for it, including deep pockets and a reputation for quality.

The company is also benefiting from the fact that copiers are increasingly being linked to corporate networks, moving them from the domain of the facilities department into the realm of IT.

"Network connectivity has been an HP strength for years," Grant said. "Copier companies are still on that learning curve. Some get it. Some don't."

Even with HP's efforts, though, the company faces significant hurdles on both the sales and technology fronts, Grant said. "It's not going to be a slam dunk."

In addition to confronting strong competition from copier makers, HP will have to face off against other printer makers targeting the same area. Lexmark, in particular, has been pursuing the digital copier convergence market. And IBM is using a strong services offering to try and boost its share of the printing market. Plus, the copier makers have recognized the threat and are working to make their machines simpler and more network friendly.

But if HP is able to make some inroads into the copier market, it could be enough to allow the company to reach its growth target for 2004, Joshi said.

The onset of a kind of offset
By the following year, HP will be looking even further up the food chain, hoping to take on the commercial printing arena, a market dominated by offset presses, with a futuristic ink-jet press the company acquired when it paid $882 million to buy Indigo, an Israeli-Dutch start-up.

Indigo's technology enables customers to get prints that look as good as those from an offset press, but that can be unique from the other prints in a given print run. That paves the way for customized marketing. BMW, for example, has used Indigo presses to create customized brochures. HP also sees opportunities for Indigo's technology in digital photography and in print runs of 500 or fewer copies, an area where the use of traditional printing presses is not economically feasible. So far, there are about 2,000 Indigo presses in place, HP says.

Although the offset market is full of promise, HP faces similar challenges there as it does in the copier field. The company must convince print shops to invest hundreds of thousands of dollars in a technology that is still proving itself. The devices may be somewhat less labor intensive than printing presses, but HP knows it has much work to do if the Indigo devices are going to be anywhere near as simple to operate as a high-end printer.

Beyond improving its product and sales efforts, HP is also trying to build a broader services business around its printers.

The company, which has long offered customer support and other basic services, this spring announced plans to give printing customers the chance to purchase the same kind of outsourcing packages it sells with its servers and PCs.

Among the most ambitious part of the services push is HP's effort to have companies turn over their entire printing operation to HP, which can charge on a per-page basis for hardware, supplies and services. So far the company has named a handful of key customers for that business, including Alcatel, that have generated some $500 million for HP.

The company is also trying to show it can help companies lower their expenses by changing the way they print and handle documents.

On that front, Grant says HP is likely to see customers pricking up their ears; companies have already exhausted many of the obvious ways of cutting IT costs. "Output is the last rock they are looking under for additional savings," Grant said.

One unique weapon in HP's arsenal is a device known as a digital sender. The unit resembles a fax machine, but instead of sending a hard copy to a distant sender, the device scans in a document and e-mails it to one or many recipients.

The Clark County, Nev., district attorney's office switched to the digital sender as a way for attorneys to quickly get documents that in the past had taken days to travel from the reception area to their offices. Now incoming legal papers are scanned and e-mailed to the proper attorneys--a move that saves the agency's clerk five hours a week in labor.

Although the idea of the digital sender seems quite appealing--it cuts down on both labor and paper consumption--the device has been only a modest success. HP sells about 20,000 of the units annually, just a fraction of the sales racked up from traditional fax machines.

Still, HP is likely to expand further into the area of document management. Customers are demanding a broader collection of devices and services than the company has traditionally offered, Joshi said.

"They would like HP to have a complete portfolio," Joshi said.

 

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