Nearly six months after
as a partner in its branded printer venture, the PC maker finally announced a launch date for the new line. On Tuesday, CEO Michael Dell said the first printers will be available next month.
Dell's latest strategic move has garnered attention because, in the long term, it has the potential to steal a vital piece of
business. Though H-P and Dell have traditionally competed in the PC market, H-P actually draws most of its profits -- 75% in the most recent quarter -- from its printing division.
But while Dell has proven it's a market share powerhouse in computer hardware, don't expect it to make immediate waves in the printer market. Dell's commoditizing prowess may give it an edge down the road, but it's not likely to make big profits at the outset.
"I like Dell, and I'd rather buy Dell than H-P, but printing isn't one of the reasons why," says Kevin Hunt of Thomas Weisel Partners. "I just don't think Dell's going to have a huge impact" on H-P, he says. Dell already resells printers from Lexmark, he points out. "Essentially H-P's competing against the same thing now, though maybe this will be a little stronger distribution for Lexmark."
Moreover, the economics of the printing business mandate Dell will have to bide its time before it can translate hardware sales into decent profits.
That's because vendors end up making a lot more money on printing supplies, such as toner and ink cartridges, than they do on actual printer hardware, which sometimes is sold at a loss. While an inkjet printer can be picked up for as little as $49, the ink cartridge that goes into it -- which needs to be replaced a few times a year -- offers much better margins. The cartridge costs nearly as much as the entry-level hardware, at around $30.
In short, printing doesn't lend itself to the kind of quick share gains that have characterized Dell's entries into other new markets. "In workstations, low-end servers and, even now, networking, they can jump right in, undercut other companies' pricing and go great guns," explains analyst Robert Cihra of Fulcrum Global Partners. "I would never underestimate Dell. But I think you have to recognize that the economics of the printer market favor an installed base. They likely will do well over time."
Even Dell, which has been tight-lipped about the launch, concedes as much. "We don't anticipate printers to have a significant impact on overall revenues in any time period we're looking out at right now," says spokesman Jess Blackburn. For the foreseeable future, Dell will draw most of its business from hardware, such as servers, storage and PCs, he says, while adding, "Obviously we intend to be profitable at it or we wouldn't go into it."
Though Dell hasn't released details of its planned product line, Blackburn says the low-end consumer and small business market is "the obvious place to start" in its launch. Over time, he says, "We definitely intend to move up through the corporate computing space."
The printer market offers scant growth, with sales expected to expand a mere 1.5% this year, according to IDC. So, to gain a foothold Dell will have to take share from existing players.
But competition has heated up: As recently as 2001, the inkjet market claimed eight players; now it has four.
And industry leader H-P can claim a good deal of momentum, having upped its U.S. market share from 46% in the second half of 2001 to 56% in the second half of '02. Since last fall, H-P has debuted a slew of new printing products in what it calls its "big-bang" roll-out. "H-P has made some significant gains," says IDC's Jennifer Thorwart. "They've also invested quite a bit in the printer category, so they're seeing that pay off marketwise."
As far as market share goes, she adds, it's at least possible that sales of Dell-branded printers could cannibalize revenues Dell draws from reselling Lexmark, Epson and Brother goods.
The bottom line: Dell is a force to be reckoned with in any market, but it won't find overnight success in printers. That's bound to offer at least a little comfort to giant rival H-P, which could use some in light of its murky revenue outlook. With analysts expecting H-P's sales to stay flat or drop this year, the company can ill afford to yield any ground in its chief profit-making machine.