Head to Head

Where do you stand in the midst of the printer and Ink showdown between Dell and HP?

Dell has declared war on its one-time partner and now principal rival, Hewlett-Packard. This pair has been fighting over computers for a long time. But now, the No. 1 computer-maker is attacking the No. 2 computer-maker where it really hurts: in printers and printer ink cartridges.

A former reseller of HP printers, Dell will release its own rebranded line of Lexmark inkjets and lasers over the next couple of months, taking the fight to the only place HP is actually making money. Dell is looking for more than just another revenue stream, explains Tim Rhodes, CEO of Provizio, a competitive intelligence firm in Boise, Idaho. It wants to cripple HP by starving it of ready cash.

What that means for you is strong downward pressure on the price tags of just about every type of inkjet and laser. HP, which ships about half of all printers, is releasing a flood of significantly cheaper models such as the Color LaserJet 2500. At $999 (street), it's going for half the price of the printer it replaced. Nice, but that's just an appetizer.

"We think we can cut the price of printer consumables by 40 percent from what HP is currently charging," CEO Michael Dell told industry bigwigs at a recent analyst soiree.

That's pretty doable, says Rhodes, because Dell sells direct and saves about that much in reseller margin alone. Doable, but not easy--Hewlett-Packard is a marketing powerhouse that has turned back many assaults. HP CEO Carly Fiorina, who dismisses Dell as just a distributor of other people's stuff, points to the $900 million HP is spending this year on a new generation of ink cartridges.

But Dell, which already sells about 2 million printers a year, doesn't have to supplant HP to make a difference in your printing bill. By squeezing the difference between manufacturing cost and selling price, Dell could unhinge the marketing model under which all printer-makers have operated for the past two decades. That's good for you, but bad for just about all resellers of computer prod-ucts. The humble printer cartridge was the No. 1 retail sales generator in 2002, says NPDTechworld, and one of the few areas in which a profit-starved com-puter industry still has margin left. Ink cartridges are the crown jewels in more than just HP's business.

Cheap and Cheaper
Look across your office over all those PCs, monitors, printers and network adapters. About every piece of hardware has become a commodity that delivers huge productivity improvements at incredibly low prices.

Yet your ridiculously cheap inkjet or laser needs frequent refills of ink or toner. Each could easily cost you a third to half of the printer's original list price-over and over again. In this razor/razor blades marketing model, the fairly complicated printer is sold cheaply, and printer-makers profit by selling disposable ink cartridges. Financial analysts refer to printers dismissively as "sockets" for cartridges.

A $30 to $50 inkjet cartridge costs $2 to $4 to manufacture, a $75 to $200 laser cartridge $10 to $20, says Mark Ansier, vice president and managing director of TonerPlus/ALBAAT. His company manufacturers and/or refurbishes both and sells them at prices as much as 40 percent below the printer manufacturer's list.

That wall of cartridges in Office Depot? The only difference between many of them, says Ansier, is a tab here or a knob there added to keep them from working in another brand or even model of printer. Ansier makes a few changes and sells the same cartridge for use across several different brands. He has to collect and refill HP empties as is, though, because HP has a patented way of melding the printer head to the ink reservoir.

Still, resellers like TonerPlus/ALBAAT have garnered 15 percent of HP cartridge sales, says Lyra Research, and the longer a cartridge is on the market, the more share the resellers capture. The rapid introduction of new printers requiring unique cartridges only slows them down for a while, notes Jim Forrest, managing editor of The Hard Copy Supplies Journal.

Most of that $900 million HP is spending will be used to shore up its aftermarket, predicts Ansier, with semiconductors that inhibit cartridge refurbishing, and to come up with marketing that will convince buyers it's dangerous to use non-HP ink cartridges. Will we see fancy new printing technology? No, ink cartridges haven't done much more than put ink on paper in about a decade, says Ansier, who couldn't be happier that Dell switched from HP to Lexmark printers. The 2 million printers with hard-to-copy HP cartridges that Dell used to sell will now be replaced by sockets for easy-to-copy Lexmark cartridges.

It's quite an apple cart Dell is about to upset. The rub could come the first time you need to buy a cartridge quickly. There's no calling up an office-supply store to deliver $50 worth of Dell consumables in a hurry. They'll only be sold off the Dell Web site, which ships computers in five days. It's unlikely Dell would ship low-ticket consumables more quickly--unless you're willing to pay extra.

That would reduce the attraction of the Dell product, but analysts expect the company to introduce ways for Dell computers or printers to warn you when ink is running low. Dell might also be counting on guys like Ansier to help serve "gotta have it now" customers.

In any case, Michael Dell is about to introduce a new brand of hardball to the printer business. Whether he succeeds or fails, it's doubtful that printer and ink prices will ever be the same.

GIVE IT BACK

Why throw out used ink and toner cartridges when you can get paid to recycle them? Visit www.entrepreneur.com/mag/digitaledge for a list of firms offering buyback services.

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This article was originally published in the February 2003 print edition of Entrepreneur with the headline: Head to Head.

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