Black Gold: Hewlett-Packard Shifts Emphasis From Printers to Ink

Everyone's heard about the mutually destructive price war raging among personal computer manufacturers. Wall Street is obsessed with it. But when people talk about the "price war" around Hewlett-Packard's (HWP Quote) Palo Alto, Calif., headquarters, nobody's thinking about PCs. They're thinking of printers, the products that, more than anything else, determine H-P's fortune.

For months, H-P has been engaged in an intense battle to increase its share of the market for inexpensive inkjet printers. The fight is taking a predictable toll on profit margins. But make no mistake, the printing business offers something that the PC business doesn't: the chance to sell ink. Known as consumables, printing supplies are extremely high margin items capable of more than offsetting losses on printers themselves. And because of them, H-P's strategy of chasing printer market share could have a big payoff.

H-P has been dominant for years in the overall printer market, a good portion of which includes high-margin laserjet printers. But the company hasn't always had much stomach for playing in the low-end inkjet segment, which industry analysts generally define as printers selling for less than $100. Fearing the damage that a price war could inflict on profit margins in its imaging segment, the company sat back for years while competitor Lexmark (LXK Quote) built a big business in cheap inkjet printers. And when H-P finally did go after the low-end market, it did so very tentatively, selling printers through wholly owned subsidiary Apollo Consumer Products, which the company created in 1999. The introduction of Apollo was largely seen as a defensive move, an attempt to test out the market without endangering the H-P brand. ...