Dell Computer CEO's Printer Plan Sets Stage for Fight
By Peter J. Brennan
Austin, Texas, Aug. 15 (Bloomberg) -- Dell Computer Corp. Chief Executive Michael Dell is considering moving the world's second-largest personal-computer maker into the printer market. He may be in for the fight of his career, investors say.
Executives at rival Hewlett-Packard Co., the No. 1 maker of PCs and printers, said they have plans to deal with a Dell encroachment on its most lucrative business.
Dell, which boosted its PC market share to 14.9 percent from 10.7 percent two years ago as it made manufacturing more efficient and passed savings on to customers, is seeking new markets as corporate PC sales stagnate. Hewlett-Packard may be willing to cede its lead in low-profit PCs to Dell. That's not the case with printers, a business it will defend with price cuts, patent suits and new products, investors said.
``Things are about to get nasty,'' said John Spytek, a money manager at Balyasny Asset Management, which owns Dell shares and invests $300 million. ``They're going to take the gloves off over at H-P.''
The potential battle in printers is one Michael Dell needs to win if he's going to fulfill his promise of doubling revenue from last fiscal year's $31.2 billion. Growth in PC shipments industrywide is expected to slow to 9 percent annually until 2007, from an average 18 percent a year in the 1990s, according to researcher Dataquest Inc.
Dell later today will report fiscal second-quarter profit of 19 cents a share on sales of $8.3 billion, estimates the company gave on July 11. A year earlier, Dell had a net loss of $101 million, or 4 cents, on sales of $7.6 billion.
The shares of Dell rose 33 cents to $27.48 at 9:33 a.m. New York time on the Nasdaq Stock Market. The Austin, Texas-based company's stock has fallen 2.2 percent in the past year.
Printer Plans
Michael Dell, 37, who owns 13 percent of the company he founded in 1984, declined to comment for this story, spokesman Mike Maher said. Dell, who is also chairman, gained $81 million by exercising stock options in the year ended Feb. 1. His salary increased to $925,962, and his bonus fell to $347,236.
President Kevin Rollins in July said the company will begin making its own printers by year-end. Other Dell officials declined to discuss plans for printers, Maher said.
Dell has shown it can gain ground in markets beyond PCs with its expansion into servers, the computers that run networks and Web sites, investors say. Dell started selling the machines in 1996 and now ranks No. 2 in the world, with 18 percent of the market, Dataquest said. Hewlett-Packard is No. 1 in servers.
Dell also sells computer-network switches, movie projectors and storage devices. Rollins in July said the company will soon start selling hand-held computers that compete with devices from Hewlett-Packard and Palm Inc.
Lexmark, Xerox
Companies such as Lexmark International Inc. and Xerox Corp., better known for making copiers, have tried to chip away at Hewlett-Packard's 39 percent market share in printer shipments, according to Dataquest.
``There's always someone taking a run at us,'' said Chris Morgan, vice president of printer sales and marketing at Hewlett- Packard. ``Xerox, almost all the laser players have made attempts over the years.''
On July 23, Michael Dell got his first taste of Hewlett- Packard's intention to protect its position. The Palo Alto, California-based company said it no longer would sell printers to Dell. Dell can still obtain the printers to resell with its PCs through the distribution market, at higher costs.
``You don't want to be giving your competitor any kind of help,'' said Chuck Jones, an analyst with Stein Roe Investment Counsel, which manages $8 billion and holds 71,600 shares of Dell. ``If you're going to compete with me, why am I working with you?''
Earnings
Printers wouldn't help Dell's earnings until fiscal 2006, when the business may add 3 cents to 5 cents a share to Dell's annual profit and as much as $2 billion in sales, said Andy Neff, an analyst with Bear Stearns & Co. Hewlett-Packard's printing and imaging business generates almost $20 billion in annual sales.
``Could Dell do to printers what they did to PCs?'' said Neff, who owns shares of Dell. ``Everyone says, `Of course they can't,' but they could have said that about servers.''
Michael Dell faces other obstacles in the printer market, investors and analysts said. Hewlett-Packard already has a vast installed base, which guarantees a steady flow of sales from the cartridges that supply ink, even when profitability shrinks on the printers themselves.
``Every time you buy a PC these days, it's like a printer is thrown in for free,'' Spytek said. ``How many free printers do we need?''
Research Spending
Hewlett-Packard CEO Carly Fiorina also plans to outspend Dell to develop new products. She has said she will invest $4 billion annually in research, and her company said it would spend $1.23 billion to introduce more than 50 printers and other imaging products for consumers through early 2003.
Michael Dell has said he won't significantly boost his company's research budget from last year's $452 million.
``They won't be successful in this business,'' Hewlett- Packard's Morgan said. ``Printing is heavily based on research and development. It's not synonymous with Dell's business model.'' |
