Specter of Dell printers hovers over HP

Speculation about Dell's impending entry into the printer market has been a hot topic on Wall Street since Bear Stearns analyst Andrew Neff last month issued a report mulling over when the direct PC maker might make that move. A Dell printing initiative could have a significant impact on HP, which considers its own printing business its "crown jewel" and the source of most of its profits.

None of that was lost on the crowd at the Bear Stearns technology conference here Thursday, as Jeff Clarke, HP's executive vice president for merger integration, delivered his presentation and fielded questions about Dell's alleged printing plans.

Clarke had an answer ready.

"You have to have your own (intellectual property) as well as a supply chain," he said.

The HP executive expressed doubt that Dell could succeed in a market where it has neither of those things, and HP has both. He also called the PC maker a "direct player" with "no competency in retail," something that would be needed should it go into the printer business.

Clarke then tried to move on, only to be interrupted by more insistent questioning.

"I think this is a crucial issue for this company going forward. Dell hasn't failed at anything they've tried yet," said someone in the crowd of around 2,000 fund managers and investors attending the conference. That person said he didn't understand Clarke's logic and insisted that he give a better answer.

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Clarke elaborated by saying that Dell could enter the printer business in one of two ways--each destined to fail. If Dell were to manufacture the printers itself, it would struggle with the cost of acquiring intellectual property and buying components. Compaq Computer, newly acquired by HP, considered a run at printer manufacturing but gave up for that very reason, he said. Compaq decided in 1998 to let Lexmark do the work.

The other possibility, he said, is that Dell could engage in a similar partnership with an outside manufacturer. But Dell doesn't have the retail skills or customer relationships to make that alternative work, either, Clarke said. The company would also have to split margins with the manufacturer, and the business wouldn't be all that profitable for it, he added.

Clarke also pointed to Dell's attempt to enter the storage market, calling it a failure because Dell ended up partnering with EMC.

Dell wouldn't comment on whether or how it would go into the printer business, but spokesman Mike Maher dismissed as irrelevant Clarke's argument about Dell's retail capabilities.

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"Our direct relationship with customers makes us an even better seller," he said, adding that the company successfully sells printers from Lexmark and other manufacturers, along with other peripheral devices, through its direct model.

Neff, who moderated Clarke's talk, said his concerns for HP went beyond printing.

"While HP stresses (that) cost savings (are) better than expected and remains bullish about its prospects in fiscal year 2003, it appears to have come at the expense of lower growth in the near term," Neff said in a research report following the presentation. He added that two of the company's four businesses--PCs and enterprise systems--already "face a challenging outlook against the backdrop of an unforgiving economy."