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Yet cutting jobs is easy compared with boosting profits while a lean and hungry rival like Dell is gnawing at you. From 2001's third quarter to this year's, Dell gained market share in two of Compaq's core segments: PCs and large corporate computers known as servers. Moreover, Dell figures that it can leverage its low-cost, direct-sales model to profit from just about any tech product whose components have in effect become commodities. Dell is angling to sell everything from personal digital assistants to its own brand of printers and ink cartridges, as well as an increasing array of networking gear, storage devices and services. "Dell is targeting just about every profit pool HP has," says industry analyst Julie Giera of the Giga Information Group.
Printing is shaping up as a crucial war zone. HP's imaging and printing division is a diamond mine, yielding $3.2 billion in profits in its past fiscal year. Most of that money comes not from printers but from sales of ink and toner cartridges that owners of HP printers buy almost exclusively from HP. While the firm barely breaks even on inkjet-printer sales, HP makes profit margins of about 60% on those cartridges, according to Charles Wolf, an analyst at Needham & Co.
Dell wants a slice of those printing profits and at the same time wants to crimp HP's cash flow: the money HP makes from selling cartridges helps subsidize its profitless PC and enterprise-computing divisions, which, with Compaq, lost $1.7 billion in the two companies' past fiscal year. "Michael Dell will bomb the market," says Wolf. "He'll be happy to make an 18% margin, which HP can't afford."
Also in a bid to strike at HP, Dell is pumping up its slate of services. Backtracking on its self-help model, Dell recently extended an agreement with EDS to provide higher levels of support to PC users--a way for Dell to potentially make more money from PC sales and take a larger slice of the services market. Taking care of high-powered servers could become more lucrative too. Dell figures that as machines running on Intel chips and Windows or Linux software continue to improve and drop in price, so too will prices to install and service them, falling to the kinds of commodity levels at which Dell might maintain an edge. Rivals fear that because Dell's overall business is thriving, the firm will be able to afford to take a lower margin on such services and drive down prices across the board.
Does Dell hold a hand of aces? HP doesn't think so. In printing, says Mark Stouse, HP's director of opposition research, most printer and ink-cartridge sales go through dealers and retail stores, sales channels that have not been Dell's focus. And despite a decade of competition from lower-priced rivals such as Canon, Epson and Lexmark (Dell's partner to manufacture its printers and cartridges), HP remains the printer champ.
In services, HP thinks its soup-to-nuts packages will prevent Dell from encroaching on its small-and medium-size business clients. Dell is just starting to ramp up its service offerings, and HP has broad experience working with such partners as Accenture and KPMG, helping clients better manage their tangle of PCs, servers and storage devices.