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Feature ArticleIMA GIN G SPE CTR UM MA GAZI NE
International Imaging Technology Council
Editor’s Note: This is the fifth article in a six-part series that will pro-
vide an in-depth overview of the fastest growing channel in the imag-
ing industry, the SOHO channel.This segment covers the emergence of
Dell as a major player in this market.
The Celtics versus the Lakers; the Yankees versus the Red Sox—all
great rivalries for the ages . . . .
But they have nothing on the IT battle of the century that is shaping
up between Hewlett-Packard (HP) and Dell as they fight it out for
supremacy in the PC market and for the golden goose of printer
consumables.
The PC Wars
The genesis of this epic struggle dates back to the PC wars of the late
1990s as HP and Dell fought for profitable PC revenue.When,in 2002,
HP purchased one if its biggest PC rivals, Compaq,PC prices were on
a slow, steady decline towards commoditization. The low profits
derived from PC sales and the unwieldy acquisition of Compaq was
Luke Goldberg is responsible for developing overall market/industry analysis and sales trends,expanding
dealer channels,managing the Future Graphics sales team of professionals as part of the new product
development and marketing/promotions team.He has more than 14 years of experience in the imaging
supplies industry.He may be reached at 800-394-9900.
The SOHO Market, Part V: Upsetting the
Applecart—The Emergence of Dellby Luke Goldberg, Future Graphics
International Imaging Technology CouncilFeature Article
48 Imaging Spectrum Magazine ✴ July 2005 ✴ International Imaging Technology Council ✴ www.i-itc.org
I M A G I N G S P E C T R
U M M
A G A Z I N E
considered by many in the HP brain trust to be a departure from HP’s
core business philosophy—and would ultimately be the coup de grace
for Carly Fiorina.
By 2000, as PC margins started to decline, PCs were viewed in large
measure by HP as vehicles to drive ink and toner consumables’ rev-
enue. During this period,many of the PCs that were sold were cross-
marketed with entry-level inkjet or monochrome printers. By thistime, HP’s IPG (Imaging and Printing Group) was already generat-
ing more than 75 percent of the company’s net profits (see Figure 1).
The importance of maintaining profits from consumables was, and
is, the lifeblood of HP.
Dell’s Strategy
As HP and Dell fought over this PC business,it is clear that Micha
Dell saw that the only way to compete with HP would be to targ
the repeat business offered through the sale of consumables.
Ironically, as recently as 2002, Dell was a great customer for HP an
sold almost two million HP printers between 2002 and 2003. De
saw the huge margins that could be made by more closely partne
ing with another OEM and then unleashing its direct distributio
model with a full-blown sales effort (see Figure 2).
The Innovator versus the Distributor
Having looked at the historical imperatives that have led to the escala
ing competition between Dell and HP,it is important to understand th
very different corporate philosophies that drive these two behemoths
HP has always envisioned itself as an innovator. This is underscore
by its corporate tag line, “invent.” As Fiorina was fond of pointin
8/20/2019 Goldberg Soho5 0805
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Goldberg:The SOHO Market, Part V:
Upsetting the Applecart—The Emergence of Dell
out, HP files an astounding 11 patents per day with an R&D budget
of more than 2 billion per year. Conversely, in regards to Dell, she
has stated,“What Dell has basically perfected is the direct distribu-
tion model of other people’s innovation and invention.” (HP versus
Dell , Lyra Research Group, Webinar, March 30, 2005.)
Dell, it can safely be said, is laughing all the way to the bank; clearly
their model has served them well. In 2004, they profited $2.65 bil-lion, 1 billion on the printer business alone. HP, on the other hand,
only managed $2.45 billion in profits,on almost $25 billion more in
sales (see Figure 3 on operating expenses). Since they spend virtu-
ally zero dollars on R&D, Dell can profit on much lower sales.
The $900 Million Question
In 2004, Dell sold 5 million printers using mostly Lexmark and,
more recently, Samsung and Fuji Xerox technology. HP by compar-
ison is on pace to sell 50+ million printers this year.According to thedeparted Fiorina,“It takes a $900 million investment for us to pro-
duce the next level of printing technology.”
The $900 million question then is: “Does the consumer care about
how much money is spent on R&D as long as the product works?”
The answer, according to numerous consumer reports, is that cus-
tomers are not convinced that the expense of R&D is worth paying
for. Most rate Dell very favorably against HP and others.
As Michael Dell says,“If a company spends a billion to make it so
that nobody can copy what it has, does that help the user or the
manufacturer?”
Simply put, what Mr. Dell is stating is that the consumer foots the
bill for all of that innovation by paying exorbitant prices for imaging
consumables.
The Most Expensive Liquid on the Planet
As is the case with all SOHO product categories, printers are getting
cheaper and cheaper and have greater capabilities. However, as has
been shown, consumables are where the lion’s share of OEM profits
lies. It is this razor-and-blades selling strategy that creates so much
