[FoRK] cashing out on other's innovation

Eugen Leitl eugen at leitl.org
Mon May 24 08:13:54 PDT 2004


May 24, 2004
The Distributor vs. the Innovator

"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

"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

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

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." 

Eugen* Leitl <a href="http://leitl.org">leitl</a>
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