Look no further than stock prices to guess the likely winner and loser from

Dell's

(DELL) - Get Report

latest move. Tuesday morning the boxmaker said it had chosen

Lexmark

(LXK)

as a partner to develop and manufacture inkjet and laser printers and cartridges.

By midafternoon, shares of reigning printer supplier

Hewlett-Packard

(HPQ) - Get Report

were down 61 cents, or 4.7%, to $12.27. Meanwhile, Lexmark surged $4.46 on news of the partnership, tacking on 10.5% to $46.93, while shares of Dell got a mildly positive boost, adding 30 cents, or 1.2%, to $24.49.

As the market amply demonstrates, H-P is the likely loser. That's because Dell, renowned for its ability to commoditize hardware markets and hungrily reap market share gains, is going straight for H-P's jugular, taking aim at the profit center of its chief rival.

"H-P represents the only PC company big enough to give Dell a hard time," says Roger Kay, director of client computing at IDC. "The only way to really hurt them is to go after their printer business."

In the past, says Kay, the printer industry has been characterized by a "sort of gentleman's agreement not to have price wars so the companies can survive. Once Dell enters, all bets are off. They're going to make it very hard for H-P to maintain its market share and profits."

H-P desperately needs to maintain the health of its printing division, which analysts are fond of referring to as the crown jewel (to put it more aptly, the only jewel) of its business. While the printer arm has generated steady profits, both its computer and enterprise lines were in the red for the most recent quarter, a reflection of its troubled hardware business.

In stark contrast, Dell's core hardware business has stayed robustly healthy. Over the past year, its share of the desktop and notebook PC markets (which generate more than 80% of revenue) has steadily increased at H-P's expense.

In the second quarter of 2001, H-P and Compaq together accounted for 17.9% of worldwide PC shipments, while Dell claimed 12.7% of the market. By the second quarter of 2002, the combined H-P-Compaq's share had slid to 15.4%, while Dell had moved up to 15.0%.

Ganging Up on the Leader

From Dell's perspective, printers are likely to remain merely a profitable sideline to its prosperous computer hardware business -- while at the same time, a neat way to unsettle a rival. As far as new business markets go, analysts say printers are far less important for Dell than

servers and storage, which last year accounted for 20% of its revenue.

But from H-P's standpoint, Dell's foray into the printer business is at least mildly terrifying. Analysts broadly expect Dell to force H-P into a price war and steal away some share, although the extent of that remains unclear.

Its choice of Lexmark as a partner was apt, adds Peter Grant, principal analyst for digital imaging at Gartner. Even before it teamed up with Dell, Lexmark, which claims the No. 3 spot in market share for printers, was giving H-P serious competition.

Spun off from

IBM

(IBM) - Get Report

more than a decade ago, Lexmark boasts a Dell-like reputation for cost-consciousness. "Lexmark is much more efficient than H-P with regards to how quickly they get products to market," says Grant. "They have a shorter product development cycle. And they're vertically integrated -- they own the technology, design it, and manufacture it." By comparison, H-P outsources some of its manufacturing, which slows down the process.

It Won't Come Easy

To be sure, that doesn't mean H-P will be easy to unseat from the top spot in the printer market. A massive competitor, H-P spends generously to refine its product offerings. Last year H-P spent $1.3 billion on R&D for printers alone, points out Grant -- this, at a time when Lexmark's total revenue only amounted to some $4 billion.

Earlier this week, H-P showcased some of the fruits of those investments when it unveiled a sleek new line of printers under development for four years, including offerings in fast-growing markets like low-end color printers and high-speed color printers for the office. "This is significant in terms of broadening their market penetration. They've been losing some market share in the high-end color market to

No. 2 competitor Xerox and Lexmark and Ricoh," says Grant.

Besides competing with H-P on technology, Dell may encounter some problems in how it sells printing products. The biggest profits in the printing business are scored not from sales of hardware, but from the high-margin cartridges and supplies that are typically sold through office stores. Yet Dell has said it will market its goods just like its PCs, via the Internet or by phone.

Some analysts question whether buyers will want to buy new cartridges that way when it might be easier to make a quick run to the local office store to stock up.