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8/20/2019 Goldberg Soho5 0805
http://slidepdf.com/reader/full/goldberg-soho5-0805 1/4www.i-itc.org ✴ International Imaging Technology Council ✴ July 2005 ✴ Imaging Spectrum Magazine 47
Feature ArticleIMA GIN G SPE CTR UM MA GAZI NE
International Imaging Technology Council
Editor’s Note: This is the fifth article in a six-part series that will pro-
vide an in-depth overview of the fastest growing channel in the imag-
ing industry, the SOHO channel.This segment covers the emergence of
Dell as a major player in this market.
The Celtics versus the Lakers; the Yankees versus the Red Sox—all
great rivalries for the ages . . . .
But they have nothing on the IT battle of the century that is shaping
up between Hewlett-Packard (HP) and Dell as they fight it out for
supremacy in the PC market and for the golden goose of printer
consumables.
The PC Wars
The genesis of this epic struggle dates back to the PC wars of the late
1990s as HP and Dell fought for profitable PC revenue.When,in 2002,
HP purchased one if its biggest PC rivals, Compaq,PC prices were on
a slow, steady decline towards commoditization. The low profits
derived from PC sales and the unwieldy acquisition of Compaq was
Luke Goldberg is responsible for developing overall market/industry analysis and sales trends,expanding
dealer channels,managing the Future Graphics sales team of professionals as part of the new product
development and marketing/promotions team.He has more than 14 years of experience in the imaging
supplies industry.He may be reached at 800-394-9900.
The SOHO Market, Part V: Upsetting the
Applecart—The Emergence of Dellby Luke Goldberg, Future Graphics
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International Imaging Technology CouncilFeature Article
48 Imaging Spectrum Magazine ✴ July 2005 ✴ International Imaging Technology Council ✴ www.i-itc.org
I M A G I N G S P E C T R
U M M
A G A Z I N E
considered by many in the HP brain trust to be a departure from HP’s
core business philosophy—and would ultimately be the coup de grace
for Carly Fiorina.
By 2000, as PC margins started to decline, PCs were viewed in large
measure by HP as vehicles to drive ink and toner consumables’ rev-
enue. During this period,many of the PCs that were sold were cross-
marketed with entry-level inkjet or monochrome printers. By thistime, HP’s IPG (Imaging and Printing Group) was already generat-
ing more than 75 percent of the company’s net profits (see Figure 1).
The importance of maintaining profits from consumables was, and
is, the lifeblood of HP.
Dell’s Strategy
As HP and Dell fought over this PC business,it is clear that Micha
Dell saw that the only way to compete with HP would be to targ
the repeat business offered through the sale of consumables.
Ironically, as recently as 2002, Dell was a great customer for HP an
sold almost two million HP printers between 2002 and 2003. De
saw the huge margins that could be made by more closely partne
ing with another OEM and then unleashing its direct distributio
model with a full-blown sales effort (see Figure 2).
The Innovator versus the Distributor
Having looked at the historical imperatives that have led to the escala
ing competition between Dell and HP,it is important to understand th
very different corporate philosophies that drive these two behemoths
HP has always envisioned itself as an innovator. This is underscore
by its corporate tag line, “invent.” As Fiorina was fond of pointin
8/20/2019 Goldberg Soho5 0805
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Goldberg:The SOHO Market, Part V:
Upsetting the Applecart—The Emergence of Dell
out, HP files an astounding 11 patents per day with an R&D budget
of more than 2 billion per year. Conversely, in regards to Dell, she
has stated,“What Dell has basically perfected is the direct distribu-
tion model of other people’s innovation and invention.” (HP versus
Dell , Lyra Research Group, Webinar, March 30, 2005.)
Dell, it can safely be said, is laughing all the way to the bank; clearly
their model has served them well. In 2004, they profited $2.65 bil-lion, 1 billion on the printer business alone. HP, on the other hand,
only managed $2.45 billion in profits,on almost $25 billion more in
sales (see Figure 3 on operating expenses). Since they spend virtu-
ally zero dollars on R&D, Dell can profit on much lower sales.
The $900 Million Question
In 2004, Dell sold 5 million printers using mostly Lexmark and,
more recently, Samsung and Fuji Xerox technology. HP by compar-
ison is on pace to sell 50+ million printers this year.According to thedeparted Fiorina,“It takes a $900 million investment for us to pro-
duce the next level of printing technology.”
The $900 million question then is: “Does the consumer care about
how much money is spent on R&D as long as the product works?”
The answer, according to numerous consumer reports, is that cus-
tomers are not convinced that the expense of R&D is worth paying
for. Most rate Dell very favorably against HP and others.
As Michael Dell says,“If a company spends a billion to make it so
that nobody can copy what it has, does that help the user or the
manufacturer?”
Simply put, what Mr. Dell is stating is that the consumer foots the
bill for all of that innovation by paying exorbitant prices for imaging
consumables.
The Most Expensive Liquid on the Planet
As is the case with all SOHO product categories, printers are getting
cheaper and cheaper and have greater capabilities. However, as has
been shown, consumables are where the lion’s share of OEM profits
lies. It is this razor-and-blades selling strategy that creates so much
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International Imaging Technology CouncilFeature Article
50 Imaging Spectrum Magazine ✴ July 2005 ✴ International Imaging Technology Council ✴ www.i-itc.org
I M A G I N G S P E C T R
U M M
A G A Z I N E
consumer backlash and plays into the hands of the aftermarket,
which offers to ease the pain with lower-cost alternative supplies.
Dell has become the first OEM to expose this pricing strategy and
upset the apple cart. Undoubtedly, there is a collective yelp heard in
the boardrooms at HP, Epson and others as Dell uses its direct dis-
tribution model to enlighten consumers that they are paying too
much to print.
Dell is preaching the message that the aftermarket should capitalize
on: Enlighten customers that they have been taken advantage of,
that they have been suckered into buying low-cost printers and then
paying for cartridges that often cost more than the printers them-
selves.If anything, Dell’s message is a boon to the aftermarket.Since
our industry has been offering for 18 years now the type of savings
that Dell is offering, we are also capable of offering even greater sav-
ings when coupled with printer service, empties pickup and other
value-added services.
Direct from Dell
It is time to examine Dell’s direct distribution model and how and
why it poses issues for HP. “Dell is practically unassailable to its
competitors. Not because they can’t emulate the model, but to do so
means practically discarding the business and organizational mod-
els they have today. Most companies don’t have the stomach for it,”
says Paul Wiefels, author of The Chasm Companion, a guide forapplying popular tech-oriented business principles in a rapidly
changing world. (HP versus Dell , Lyra Research Group, Webinar,
March 30, 2005.)
HP has grown its printer business through distribution partners,
coupled with great marketing and innovative products. Dell, con-
versely, is not reliant on middlemen to market its products, nor is it
offering other products as alternatives, as is HP’s distributors such as
Office Depot or Best Buy.
Checking Out the Battlefield
As an experiment, I often go into one of these distributors to see
how (or if) HP is being represented against its competition. In one
case, I entered the establishment of a consumer electronics retailer
and asked the staff to recommend an entry-level, multi-functional
device for a small business.I told the sales rep that I wanted to spend
less than $250. The products available reminded me of the choices
one is bombarded with in the cereal aisle at the supermarket with all
the confusion created by these seemingly endless options.
The sales person recommended a Samsung. When I asked why, he
replied honestly,“We have a sales incentive for them this month.” In
every product category at retail there is a profusion of choices, fro
HP, Brother, Samsung, Lexmark and so on. However, when the D
rep calls on you, he or she is only pitching Dell.
In general, Dell is price-positioned at a 30 to 40 percent lower co
per page than its competition. Ironically, this even includes its par
ner Lexmark. How big a threat this model of price and distributio
is to HP and its distributors should be clear by now.
Too Little, Too Late?
On one level, HP is already taking steps to communicate direct
with customers. When Web Jet Admin was introduced, it enable
remote monitoring of cartridge supplies status as well as onlin
direct ordering. Additionally, HP is going after the largest users
classifies these as “enterprise” accounts) with comprehensive pri
management programs that encompass hardware, software an
consumables.
It seems unlikely—if not impossible—for HP to dramatically low
its prices. As was shown earlier, consumables revenue is the bloo
sustaining the body of HP. With much lower margins, it would sim
ply not be a sustainable model. Some think that HP may allow itse
to be more competitive by spinning off the IPG group and unbu
den itself of the less profitable business units of HP, but this remai
to be seen.
The Aftermarket’s Strong Position
As this battle matures, it seems that it creates only more opportun
ty for the aftermarket. Dell’s message to the masses preaches th
very benefits of savings on alternative supplies that our industry h
practiced for 20 years. Technologically, Dell products also pose n
major challenges,since they are based on existing engines from Le
mark, Samsung and others (see Figure 4.). Since Dell only se
direct, their customers today have no choice regarding the consum
ables they buy. Our industry will create that choice by offerin
lower-priced Dell consumables and continue to do what it has don
best: offer choice, value, environmental benefits and service th
cannot be equaled.
As this battle matures, it seems that it creates only more
opportunity for the aftermarket.