US: HP finds formula to turn ink to gold

At up to US$8,000 per gallon, the ink inside Hewlett-Packard printer cartridges could be some of the most expensive liquid on the planet. It is also a key source of profits for the US computer and printer maker.

While printer owners are frustrated about the high cost of ink, rivals see a growing opportunity to undercut HP's prices and steal some of its lucrative printing supplies business. It would appear that the price of HP ink has nowhere to go but down.

Enter Vivera, HP's new brand of superior quality photo printer ink that actually costs more per drop than the current supply.

Vivera, introduced last week, highlights HP's effort to emphasise the superior quality of its ink as part of its defence against rivals that produce generic brands or those that resell used HP ink cartridges at a deep discount to HP prices.

But analysts say HP's bet on higher-priced ink jet cartridges is no sure thing.

“Such a pricing strategy by HP is either foolhardy or suggests significant confidence in the strength of its brand,” says Richard Chu, analyst at SG Cowen.

HP, which spends about US$1bn annually on printing R&D, has long argued its more expensive ink provides the best colour quality, does not clog printer nozzles and resists long-term fading.

The group claims that Vivera goes a step further by producing superior photos that will not fade for 110 years. It also says the cartridges will print 40% faster. While cartridges could be priced up to 20% higher, HP claims the overall cost per page could drop from about 40 cents per photo to as little as 29 cents when ink and paper supplies are bought in bundles. At that price, it would cost the same to print at home as it would to take photos to a commercial printer.

Vyomesh Joshi, head of HP's printing and imaging unit, notes that creating the Vivera brand is similar to Intel's effort to establish itself as the premium source of semiconductors inside personal computers.

Meanwhile, HP will position its current ink products to compete for price-conscious consumers at the lower end of the market.

“HP has a huge target on its back. Anything it can do to help differentiate itself from competitors can only help,” says Peter Grant of research firm Gartner.

The stakes are high in the ink and toner supplies market, which research firm IDC estimates was worth US$28.5bn in the US last year. With an estimated 41% of the market, HP remains by far the largest supplier. The company's printing and imaging unit accounts for about 30% of total revenue and the lion's share of HP profit.

But rivals such as Epson and Canon are ratcheting up the pressure, as are aftermarket ink suppliers such as Carrot Ink, which remanufacture, refill and resell used HP cartridges for up to half the price that HP charges for new ones. Some analysts estimate that these groups have captured about 20% of the worldwide supplies market.

Competition in the supplies business and lower yields have pushed US inkjet prices down about 15% over the past two years, according to Mr Grant.

Downward price pressure is expected to intensify as Dell, the world's largest personal computer maker, develops its nascent printer business. The PC maker says it will eventually target HP's lucrative supplies business by undercutting HP's ink prices once it has built a sizeable base of Dell-branded printers.

Kevin Rollins, Dell chief executive, has said Dell would be satisfied with a 10% profit margin on ink supplies. That compares with HP's healthy 14-16% profit margins on ink.

Mr Joshi is dismissive of the threats. He argues that Dell lacks the technology to compete in the printing market and that the quality of remanufactured cartridges is unreliable. He says HP can sustain its ink margins over the long term “if we can continue to drive our cost of operations lower”.

Whether or not Mr Joshi is correct remains to be seen. “It's a clever idea that could work,” says Angele Boyd, analyst at market research group IDC.

But others such as Laura Conigliaro, analyst at Goldman Sachs, suggest any advantages will be temporary and will probably not alter the long-term competitive threat posed by Dell.

© 2004 Financial Times Information Limited.

Source: Financial Times.