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Technology Stocks : EMC How high can it go? -- Ignore unavailable to you. Want to Upgrade?

To: John Koligman who wrote (14590)	10/5/2002 11:05:30 PM
From: Gus	Read Replies (1) \| Respond to of 17183

I hear ya', John. We just disagree. I actually saved the best one for last. HPQ was the only top 5 vendor to lose market share in PCs, servers and storage during the last quarter. Nobody is going to take on the highly distracting burdens of a merger when HPQ is singing the merger integration blues and giving away market share like there's no tomorrow. That may very well continue into 2004 at the rate that the IT market is compressing and forcing vendors to compete with more abandon. HPQ, for example, has been giving $20,000 rebates to buyers of its networked storage to keep its storage business from deteriorating further. I think HPQ is even more vulnerable than it appears because of the way it is relying heavily on the enormous profits of its printer division to subsidize its money-losing PC/server divisions. I think Dell will eventually stand the printer market's razor and blade (single use) logic on its head by developing a disruptive razor and blade (multiple use) model that fits its asset velocity model perfectly. I do think they have to buy Lexmark ($4B-$5B) to get the patent protection -- Lexmark is a former IBM division -- to disrupt HPQ and damage its ability to compete in other areas like PCs, servers, storage, and services. How will this disruption occur? The *ideal* inkjet or laser cartridge becomes useless as soon as the ink or toner runs out for the first time since that forces the consumer to dutifully chuck the empties into the trash then go out and buy another cartridge. However, the printer industry's dirty little secret may very well be that the manufacturing processes that go into the production of the modern day inkjet and laser cartridge have evolved to a rather curious point where nobody can actually make the *ideal* inkjet or laser cartridge, one that becomes completely useless as a soon as the original ink or toner runs out! The best that anyone can do is make an inkjet cartridge or laser cartridge that can be reused 3x-5x! Under-engineering the basic cartridge design further like using lower quality plastics or foam or ink only creates major quality issues. Oh sure, a vendor can design the circuit boards on the cartridges in such a way that the consumer is forced to buy a new one every time the ink runs out, but that's beside the point because the real opportunity is turning the single-use cartridge into a multi-use cartridge. 3x-5x! Think about that. The cost of the ink in each cartridge is ONLY $1-$2 per cartridge so there's a lot of room to price way under the OEMs especially if Dell develops a new way for consumers to buy cartridges -- Printer sold with spare cartridge. Spare cartridge is used and empty cartridge is mailed back to Dell Remanufacturing which promptly sends back a spare. Even now you can actually buy a remanufactured inkjet cartridge for 50%-70% less than the price of the OEM cartridge. Office Depot, for example, buys remanufactured cartridges from China and sells it under its own brand name side by side with the OEM cartridges. Dell will have more room to work the details of this disruptive model out if they buy Lexmark which has 18% of the entire market vs HPQ (50%), Epson (17%) and Canon (10%). And I think they have to do this soon to exploit HPQ's merger difficulties. The benefits to Dell, of course, go beyond just acquiring large chunks of a $20B a year business that currently provides HPQ with 17% operating, not gross, operating margins. Dell's own gross, not operating, gross margins are below 20%!!!! The slow-motion slaughter of HPQ's cash cow will destabilize HPQ further and make it lose more market share and key employees. Dell may even get to enjoy the delicious irony of a grimy Texas company doing more to unclog landfills than a hoity toity California company since more than 90% of all inkjet and laser cartridges are currently used only once and go straight to the landfills. Tell me what you think.<g>