Xerox targets HP with printer alliance

The three companies said they will spend approximately $2 billion over the next five years on research, manufacturing and marketing products in what remains a relatively unglamorous--but profitable--corner of the computing market. Starting this summer, the venture will bring to market new printing technologies that will speed inkjet printing by up to 50 percent while reducing the overall cost of printing.

The target of their activity will be HP, long the looming shadow in the printer arena. The company, which participates in nearly every hardware market segment, garners a large portion of its profits from printing and imaging products, according to some estimates.

Xerox, which has seen operating profits and its stock price decline recently, estimates the inkjet business to be a $57 billion a year market that's growing at around 19 percent annually.

"Xerox, Sharp and Fuji Xerox together can accomplish what none of us could have done alone," Rick Thoman, Xerox president and CEO said in a statement.(Fuji Xerox is a joint venture that sells printing and office equipment in Japan and Pacific Rim countries.)

HP begs to differ. "This is a consolidation of companies we've already been competing against. We don't see this as a dramatic new challenge to us," said an HP representative.

Analysts think that tapping into the inkjet market will be an uphill and quixotic task for Xerox, alliance or no.

HP is the dominant force in the printing business. "Of the $3.36 in earnings we anticipate for the entire company this year, we expect roughly $2.20 to come from printers and printer supplies," wrote J.P. Morgan analyst Daniel Kunstler in a Feb. 15 report, which would mean the imaging business accounts for two-thirds of HP's profits. HP did not break out printer profits in a recent earnings forecast, but it said the division grew by 13 percent in its last fiscal year and that sales, especially of replacement cartridges, remains strong.

Revenue from "consumables" such as ink cartridges is benefiting from interest in the Internet and digital photography, chief financial officer Bob Wayman said in February. "Two to three times more ink is used when people print off the Web" compared to more traditional tasks such as printing letters, he said. And printing a photo uses as much as 10 times more ink, he said.

Overall, HP currently enjoys a substantial lead in the inkjet market, having shipped about 43 percent of all printers in that segment versus 24 percent for its nearest competitor, Epson, according to 1999 worldwide shipment numbers from research firm Dataquest. The $11.5 billion market expanded around 30 percent, compared to 1998 results, Dataquest figures.

"HP absolutely dominates (the inkjet business)," said Dataquest analyst Paula Bursley. HP's brand-name recognition and its long-standing relationships with retailers will continue to make it difficult for Xerox to make headway.

The alliance, she said, has a chance to gain a foothold if, she emphasizes, their technology performs as promised.

Xerox claims that products due out in the coming months will print color pages at least 50 percent faster than comparable products from HP and others while costing 20 percent less. It said this is achieved by a new printing technique in which all of the color inks are "sprayed" on the page in one pass. Most printers take two passes across a page to lay down two colors at a time, which slows the printing process, Xerox said.

In addition, Xerox claims it has developed printheads that last up to 10,000 pages before needing replacement, an amount far greater than its competitors.

"It's the technology that will distinguish us in the marketplace," said Jim Firestone, president of Xerox's channels group. "The alliance with Sharp and Fuji Xerox will bring large volume manufacturing skills to the table and enable us to bring the technology to market at a competitive price," he said.

Alliance members say they are already gearing up for the effort. Xerox has updated and opened new inkjet parts plants in Ireland, New York and Brazil as part of the effort, while Sharp has built a dedicated inkjet product manufacturing and assembly center in the Philippines.

The alliance wouldn't be the first step Xerox has taken to better position itself in the printing business. Last year, Xerox bought the printing division of Tektronix to instantly catapult it into second position in color printers, behind HP.

Xerox's push to increase its presence in what is obviously a profitable market for HP comes as Xerox's stock price has dropped about 62 percent from its 52-week high. In particular, the company is seeking to boost its own results after seeing profits from continuing operations fall 16 percent last year to $1.42 billion.

So far, investors haven't reacted to news of the alliance. The company's stock was down .69, or about 3 percent, to 23.81 in late trading.

News.com's Stephen Shankland contributed to this report.