HP's printer challenge

February 8, 2008: 4:00 AM ET

As sales growth slows, the focus shifts to services

Vyomesh Joshi
HP Executive Vice President Vyomesh Joshi wants to use software and services to drive printing profits. Courtesy: HP

Even during the bad times, Vyomesh Joshi's printing business at Hewlett-Packard (HPQ) was the go-to place for good news. As recently as 18 months ago, the affable executive vice president's unit accounted for more than half of the overall company's operating profits.

But things have changed since HP's dramatic turnaround took hold. HP's computing group grew profits 75 percent in the October quarter by stealing market share from Dell (DELL) and riding the popularity of laptop computers. Meanwhile the Technology Solutions Group, which sells servers and other tech plumbing to big companies, is doing well too – last quarter operating profit jumped 31 percent to $1.4 billion. "Because of our footprint, because of our global nature, we are what we talked about in the fourth-quarter call," Joshi says. "We are meeting our expectations."

Which means Joshi's Imaging and Printing Group no longer needs to prop up the rest of HP. It's a good thing, too – because Joshi has his own transformation to worry about.

Why a transformation? With printer revenue growth slowing, the old business model for printers just isn't good enough anymore.

Of course, the old model is still brilliant, and serviceable. It generally works like this: HP sells printers relatively cheaply, and charges a premium for ink. Because HP is the biggest technology company in the world by revenue, it has enormous reach and component pricing power to add new features. So the more the world prints using HP equipment, the more money HP makes.

But lately there are challenges. Look at HP's financial results, and you'll see that HP's momentum in printer and ink sales is slowing – the inkjet market that HP dominates "is likely to post only modest growth in 2008," J.P. Morgan (JPM) analyst Bill Shope wrote in a report earlier this month. There are plenty of reasons for that -- the overall home and office printer business has matured somewhat, for one -- but the reason for the printer slowdown doesn't particularly matter. The real issue is what HP is going to do about it.

I sat down with Joshi (who goes by V.J.) at HP headquarters in Palo Alto recently to talk about that; and of course, he has a plan. The key, he says, is to take the business from being about printers to being about printing.

It's a clever turn of phrase that needs some explanation. What Joshi means is, he's scouting out ways that HP can keep making money and churning out profits without having to rely as much on selling more printers and packs of ink to every single customer.

For a sense of how Joshi hopes to accomplish that, look no further than Snapfish, HP's online photo service. With Snapfish, customers upload their digital photos and order custom prints, calendars and other things. The high-margin service has become the largest of its kind on the Internet, and not just because of the website; through Snapfish, HP also powers photo services for the likes of Wal-Mart (WMT), Costco (COST) and Walgreens (WAG). Through those sites, HP gets customers to pay for using its technology, without HP having to go through the trouble of actually selling them the printers, paper and ink.

"I really believe that what we learned in photo was that this is the only way we can accelerate the analog to digital transformation," Joshi says. "This is all about pages." As in, making sure customers get more of them printed, whether that's at home, at Wal-Mart, or at Snapfish.

"Because of our footprint, because of our global nature ... we are meeting our expectations."

- Vyomesh Joshi

The software and services push isn't just about the consumer and small business markets, either -- in fact, Joshi sees the biggest opportunity to make gains in large businesses. There, he hopes to overpower copier makers like Xerox (XRX) and print services companies that lease equipment to businesses and charge them only for the pages they print. He also hopes to sell new equipment to companies that will allow them to produce more of their marketing materials in-house rather than send them out to a print shop. His pitch? HP is more efficient, and we can prove it. Put your printers on the network, use HP software to track how much you're printing, and we'll save you money.

"We go to the enterprise customer and talk to the Chief Information Officer and say, 'Do you know how much you spend on imaging and printing?' Most of the CIOs have no idea," Joshi says. "We tell them, on hard costs, on supplies and hardware, probably you are spending 1 percent of your revenue. But soft costs, like helpdesk and things that you don't know, probably you are spending 2 to 3 percent of your revenue."

HP's salespeople then propose to save them 30 percent of costs, and improve productivity 30 percent by bringing in HP equipment and software.

Saving money is an attractive lure, especially during a business slowdown, but Joshi's printing pitch is still likely to be a tough sell. Customers might be slower to change basic office functions during tough times, even with the promise of cost savings. And to justify a switch to HP's model, a company needs to consider how its spending on printed material spans marketing, facilities and technology budgets.

"I'm not saying it can't be done, because obviously they're already very dominant with printers -- but getting people to switch to one machine is a bit of a cultural change," says Shaw Wu, analyst with American Technology Research. Wu says these days he still tends to view HP's printing business as a cash cow that helps fund HP's other operations. "If V.J.'s right, these moves will provide upside opportunity; we're not modeling that as a growth contributor."

Plus, HP's digital transformations aren't always smooth. Late last year the company announced that it will stop developing its own digital cameras, despite the obvious tie-ins with the printer business; HP hasn't been gaining enough market share for cameras to become a significant source of revenue and profit growth. And HP's effort to create and sell on-demand DVDs of movies and TV shows, a business that was supposed to launch late last summer in partnership with Wal-Mart, seems to be having trouble getting off the ground.

But particularly with large businesses, HP is in position to make a strong case for its latest printing push. The largest enterprises -- the ones with the most to gain from the cost-saving plan -- are already buying something from HP, whether it's PCs, servers or consulting services.

If HP can convince them to buy print services too, Joshi may have found a key to that transformation.

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