HP puts Dell printer deal on ice as rivalry unfolds

Hewlett-Packard Co. (HP) has stopped selling its printing and digital imaging products to Dell Computer Corp., as the two companies jockey for position in a move one analyst likened to "marital jealousy" played out through largely symbolic, though still irksome, behavior.

As can be the case in such squabbles, however, HP's move could wind up forcing it to pay a much higher price than might now be imagined, suggested another analyst. The back-and-forth between HP and Dell has emerged as a consequence of HP acquiring Compaq Computer Corp., a top Dell rival, setting off a series of maneuvers from each side that, while seemingly minor at the time, might add up to something much larger as the new rivalry plays out.

"This is the cost of the merger," said Rob Enderle, a research fellow with Giga Information Group Inc.

HP notified Dell of its decision Tuesday, saying that it would no longer sell printers, digital cameras, PDAs (personal digital assistants) and other items in its imaging business to Dell. This move was a result of HP's expectation that Dell will enter the printer business and possibly the PDA market on its own, said Diane Roncal, a spokeswoman at HP.

Dell will still be able to resell HP gear through other channel partners, she said. Dell did not return calls seeking comment.

Rumors of Dell's entry into the printing and imaging space have heated up, following the merger of HP and Compaq Computer Corp. There has been wide speculation that Dell could acquire HP rival Lexmark International Inc. for printers or form a deal to sell Dell-branded printers.

In addition, HP's decision to go with Compaq's iPaq line instead of the HP Jornada brand has also triggered reports that Dell will market its own line of handheld products.

HP's move to cut Dell off from its printing and imaging products is just a continuation of this maneuvering and not based on possible revenue gains or losses on either side, said one analyst.

"This is more of a symbolic gesture than anything else," said Roger Kay, an analyst with IDC. "It's a little like marital jealousy."

The partnership with Dell was probably more beneficial for HP than its rival, Kay said. Dell's distribution channel provides a massive potential outlet for any partner. In addition, customers looking for an HP printer to go with their Dell PC will have little trouble finding products elsewhere, which means the impact on Dell customers should be minimal, Kay said.

More than anything else, HP likely made the move before Dell could announce its own printing and imaging deals.

"This issue is coming up as Dell's plans mature," Kay said. "It is pretty clear that Dell has been negotiating with printer vendors to come up with a Dell-branded printer. That is definitely something that is happening."

HP is holding on to a small lead over Dell in the PC market, according to second quarter numbers from IDC. The combined HP and Compaq claimed 15.1 percent of all units shipped worldwide in the quarter. Dell followed in second place with 14.8 percent. HP, however, saw shipments decline 16.1 percent in the quarter, while Dell posted a 15.5 percent rise. Dell had a high "attach rate" of selling printers with its PCs and would be reluctant to send any of this revenue over to a company that now includes Compaq, Giga's Enderle said.

"Dell has been cutting back on their commitment to HP and switching over to Lexmark since the merger closed," he said. "Dell had targeted Compaq directly and now that it has become part of HP, they target the new, larger HP. Dell is clearly gaining in market share, and this is business HP will have a hard time making up."

HP's abrupt shift away form Dell is the type of hard decision analysts expected the company to make after the merger but could come at a huge cost to the company, Enderle said.

"I'm not sure this was the best way to take a gamble," he said. "If Dell is successful with its own printers, HP could find itself with a powerful competitor in this space that they did not have before."

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