Printer supplies such as ink cartridges and high-quality paper are a big part of HP's profits, said Chief Financial Officer Bob Wayman, speaking at a gloomy HP securities-analyst day Wednesday. But those profit margins are being sacrificed as HP slashes prices in an effort to win more market share in low-end printers.
"As we move into the low end, we not only need a different cost structure (for the printers), but we probably need a (to cut prices) for the supplies we sell," Wayman said.
In the first half of HP's fiscal year, home-printer supplies accounted for more of HP's revenue than PCs or the printers themselves, said Pradeep Jotwani, president of the company's consumer business organization.
Printer supplies accounted for 34 percent of consumer revenue, whereas printer sales generated 21 percent, and sales of PCs accounted for 26 percent, Jotwani said. The fiscal year's first half ended April 30.
But the profit-margin sacrifice should be a temporary effect, HP said. Once the market share is secured, the company will again emphasize profit.
For now though, HP is "pricing to gain share," Chief Executive Carly Fiorina said. Despite the economic slowdown's hit on printer sales, Fiorina said HP's printing business is "strong and getting stronger." The company has about 40 percent share of the low-end business.
Presumably, HP has forecast that increased product sales will result from price cuts, said Mark Specker, an analyst at Wit SoundView. He's inclined to give HP the benefit of the doubt about the financial merits of the move.
"There's no real indication that the printing and imaging business has been managed as anything less than world-class," Specker said.
A four-year plan
Winning more of the low-end printer market is the first phase of a four-year printing and imaging strategy. In 2002 and 2003, the goal will expand to include copiers and fax machines. And in 2004, HP will try to gain a foothold in the commercial-printing market.
It's not the first time HP has tackled the market for cheap printers. Its 1999 Apollo printer was introduced at a price of $79. The company competes chiefly with Canon, Lexmark and Epson.
HP has top inkjet market share--43 percent of unit sales worldwide and 48 percent of the revenue. The higher revenue share is important because it shows that HP sells higher-end products than its competitors. Higher-end printers are good to sell because they're used more often and thus eat up more supplies, Jotwani said.
The division that sells printers and imaging products such as scanners and digital cameras is also increasing its focus on services, Jotwani said. About a quarter of those who buy HP printers directly from the company purchase an extended warranty, and HP hopes to get retail shoppers to follow suit.
And in the longer term, HP would like to get more money from Internet or wireless services that tap into printing and imaging, Jotwani said. This means building revenue-generating features into devices that do things like automatically sending photos to a Web site.
HP is also interested in printers that could scan the Internet automatically and print a customized newspaper.
The company will consolidate development efforts so the same technology works on more printer models, said Vyomesh Joshi, president of HP's printing and imaging business. For example, it will unify its Printer Control Language so the same version works for both inkjets and laser jets. And the printers themselves will be standardized so similar parts work for ordinary inkjets, photo printers and all-in-one machines that combine the functions of fax machines, printers, scanners and copiers.