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Dell dives into printer market

The computer giant unveils a deal with Lexmark to sell printers and ink cartridges directly to consumers, confirming analyst speculation.

Dell Computer has inked an agreement with Lexmark International Group to sell printers.

Dell, confirming analyst speculation, said Tuesday it has reached an agreement to work with the Lexington, Ky.-based printer maker to create a line of Dell-branded inkjet and laser printers. The companies will also create a line of Dell-branded printer supplies, such as ink cartridges. All of the new products will be sold directly to customers.

Financial terms of the deal were not disclosed.

Dell had been widely expected to begin working with Lexmark to bring a line of Dell printers to market.

Under the deal, the first move will be for Dell to make Lexmark its preferred supplier of printers during the holiday-shopping season.

That means Dell will make Lexmark its lead printer brand, putting it ahead of rivals in PC bundles. Analysts said Lexmark has been featured ever since Hewlett-Packard dropped Dell as a distribution partner in July.

Dell plans to launch its new Dell-branded printers in 2003, the company said. Dell started discussions with Lexmark in 2002 but will not say whether it also discussed deals with other printer manufacturers.

"It is our intent to have offerings with both (laser and inkjet) technologies," Dell spokesman Jess Blackburn said Tuesday.

Dell is still working on its product plans and will not reveal which models it will introduce first, or when.

Roiling the printer market?
Since HP dropped Dell as a partner, HP executives have scoffed at Dell's potential entry into the printer market, saying it won't be able to match HP's research and development prowess or its connection with customers.

"If my daughter runs out of ink while doing a homework assignment, I need that ink cartridge right now. I can't wait 24 to 48 hours" for the cartridge to ship, Vyomesh Joshi, president of HP's imaging and printing systems group, told investors during a conference call in July.

"Dell is going to face unique challenges that are not easily overcome. Not only do we have a successful model in place and an (intellectual property)-rich business, but we understand that growth will be fueled by transformational plays in digital imaging, digital publishing and commercial services--areas where Dell does not have capabilities," Diane Roncal, an HP spokeswoman, said in response to the Dell announcement Tuesday.

"We're more convinced than ever that our strategy is dead-on," she said.

What effect Dell will have on the printer market isn't immediately clear, analysts said. If Dell can cut prices on ink cartridges, it could force HP to do the same and thus put a big dent in HP's printer-related profit margins. HP counts on so-called printer consumables such as cartridges to help boost its bottom line.

Dell has yet to divulge details such as model configurations or pricing, but analysts say the company can win in one of two ways.

Dell could simply help Lexmark's sales, boosting the company's collective market share, which would in turn boost Dell printer revenue. Or, in a more spectacular move, Dell could use the relationship to introduce blockbuster products, such as very inexpensive color laser printers, or to give inkjet cartridges more bang for the buck, said Steve Baker, an analyst with research firm NPD Techworld.

"Lexmark is looking for the added volumes that having a relationship with Dell is going to bring," said Baker. "The question becomes what will Dell's real impact on the printer market be, and how is it going to affect pricing, people's perception of pricing and how products move from the manufacturer to the customer."

But just selling cheap ink directly isn't the key.

"People look at ink the way they do at tuna fish, paper and gallons of milk. People are pretty good about item price-shopping," Baker said. "If Dell's strategy is going to change (the market), it's going to have to be with products like a $20 full-size cartridge (which typically sell for $30 or more now) or very long-lasting cartridges. It has to do something that really changes the printer-ink relationship."

In any case, HP isn't taking the Dell threat lightly.

HP has already launched a barrage of inexpensive printing and imaging products to boost its market share and advance its technological lead.

On Monday, HP revamped its business printer lineup with a color laser printer that will sell for $999--half the price of what was previously its cheapest model.

In June, HP also introduced new consumer printers. At the time, HP CEO Carly Fiorina billed the product launch as the "defining moment in the evolution of HP's imaging and printing business."

In contrast, Dell is setting the bar low. At least for now, Dell said it doesn't expect to see a big jump in printer sales volumes. Instead, the company seems to be focused on making printer sales more profitable by lowering costs.

"We sell in the range of about 2 million-plus printers per year now, selling our suppliers' products. I don't think we're anticipating we're going to have a great leap above that initially," Blackburn said.

Potential risks
The move into the printer market--and other areas for that matter--isn't without its risks.

For starters, Dell increasingly risks alienating partners. In addition to HP, which dropped a distribution deal with Dell, Cisco Systems and 3Com have stopped working with the company.

Given Dell?s intent to compete with these vendors in certain product categories, each one has changed its reseller agreement with Dell," Salomon Smith Barney analyst Richard Gardner in a report said. "The fear is that Dell might suffer material near-term revenue loss."

According to Gardner, the HP deal amounted to about $300 million a year in sales for Dell. The 3Com and Cisco distribution deals together were worth less than $100 million in sales, he said.

Gardner said he believes Dell can make up any lost revenue, but other analysts note that the PC maker's penchant for new markets may hurt future partnerships.

Efficiency is another key issue for Dell as it enters new markets. Academics and industry analysts question whether Dell can continue to keep its operating costs down as it enters new markets.

Dell said its cost structure is what allows it to enter new markets, including printers.

"One would have all the same expectations around these products when we bring them to market" as other Dell products, said Blackburn, referring to the company's printer move. "We always try to provide products our customers want at a price that makes it hard to choose someone else."

News.com's Larry Dignan contributed to this report.