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Hewlett-Packard: a wannabe Kodak?

Photos and printing dominate marketing strategy

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Analysis Hewlett-Packard got off another round of digital media products this week, including the long awaited joint venture to supply Apple iPods branded as HP devices, with most of the new devices hitting stores all over the world during September. But listening in on the hoopla that made up the Hewlett megalaunch of yet more digital products (last year it launched 158 products in its first ever digital media slugfest), Faultline was struck by one thought – that even after a year in the market, the only digital media product from HP that we can name is one that comes from another company, the Apple iPod.

The other brand names perhaps explain why, by name they are the Photosmart 375 Compact Photo Printer, the Photosmart 2710, the Photosmart 8450, the HP Photosmart R607 Digital Camera and the ep9010 Digital Projector. OK, that’s not all that the company launched, but let’s deal with these first. The 375 prints photos on the move, the 2710 prints photos at home, the R607 takes digital photos and the ep9010 can, among other things, project your digital photos on the wall.

HP has even cut a deal with American Greetings, one of the two giants that along with Hallmark Cards, dominates the $4bn plus market for greeting cards. Don’t buy them in a store, personalize them, then print them on one of the above devices using special inks and paper, again from HP.

So apart from the iPod, these announcements are just about printing and photos? Right?

Well we hope not, for the sake of Hewlett-Packard, because although HP may win that particular battle (and we can’t be sure that it will), it is not the big picture of the digital media war.

Oh it’s a profitable enough business area and it leverages from what HP already does well, but the promise that Carly Fiorina made on the stage last week, that homes everywhere can make photo prints for the same price as they can in the retail store is probably not promise enough.

The release literature suggests that a print can be made with HP’s new specialist paper, photo printers and with its specialists inks, at 29 cents a time. That may well be true and we are not about to check the math, but in the end the only advantage customers are going to get is not taking film to the mall and waiting 24 hours for photos.

Snap Happy

Steps are already under way, primarily by Kodak, to create a photo market within the mobile phone. Phone based cameras don’t yet have sufficient image density to compete with true digital cameras, but they will in a few short years. After that point the route from the camera (phone) to home is shortened, and then printing out photos might be dominated by the company that dominates the phone cameras.

Kodak is the brand you’d associate with camera film dominance and it operates at around $13bn a year with a healthy chunk of that in medical imaging (another offshoot that might tempt HP given its medical roots).

But Kodak is a company that had negative cash flow last year, has only $800m in cash, and $2.9bn in debt, which is also trying to transition into being a digital company, growing its Easyshare digital camera business, increasing its efforts to allow consumers to print photos at home and which is now offering to make film and materials for other suppliers. Sound familiar? If HP wants that role in the digital economy, it is hardly going to make for deliriously happy shareholders.

No, the photos business is mostly nickels and dimes, it is a low margin business that we assume that HP is viewing like “ink cartridges” for laser printers, a permanent replacement business with a premium for the brand.

Compared to that $13 billion of Kodak’s it might do better to go after the flat TV screen market which is already worth $15 billion even though it currently only makes up 3 million devices out of a 200 million device a year TV market.

Well, of course, HP has also done just that, announcing new flat TVs backing both plasma and LCD screen technologies. But this has more than just one downside for HP too.

Pity the poor consumer

Every basic technology provider such as Samsung and Sony and Philips has both tried to introduce some new, cheaper to churn out technology, as well as ramp their existing technologies to around double the volumes they were last year. In the TV market these companies are creating, the poor consumer is expected to replace his or her worn out TV set with a flat screen, wirelessly attached, HDTV playing TV, complete with bundled DVR and DVD writer. Or at least that’s where we are likely to be in two to three years.

The fight is on to create the technology of choice for that future device, and two new entries, in Intel and Texas Instruments have tried to join the TV component suppliers by experimenting with micro mirrors and Liquid Crystal on Silicon devices.

LG Philips has promised to spend about $21bn over the next ten years making better and better, and cheaper and cheaper LCD screens.

Now, in a way this only benefits HP. It’s not playing in the genuine technology stakes. It’s not its R&D that’s at stake. All it does is take the best available technology, from the cheapest supplier and put it in a device that it has designed for volume shipments to its existing retail partners. But there’s not much margin in that.

Fiorina herself described HP retail partners as taking up 10 per cent of all global shelf space. HP has deals with US operations including Circuit City, CompUSA, Best Buy, Office Depot, Staples, Radio Shack, Fry's, Amazon.com and Costco.

Yes, Carly but that’s not just with HP products is it? And right alongside your TVs will be every other brand of TV, many of which are made by the suppliers of your basic, underlying screen technology. The outcome is that they make twice the profit whenever they actually sell a device. And their brand usually means (certainly in the case of Sony) that they can get away with charging even more, because their brand is recognized in this space, and the HP brand is not. At least not yet.

Another unnerving thought is that currently the TV space is ripe for a price war. While most manufacturers are gearing up for doubling the size of their flat screen output, Thomson has sold off its CRT based TV operation to a joint venture with Hong Kong based TCL which makes TVs in China. TCL is being hit by dumping duties when it tries to export CRT based low end TVs, so it plans to switch to high end flat screen devices for overseas shipment. Last year it exported just under 4 million TVs and made around 13 million in total. If it shifts the exports to flat screens, the market will flood.

Faultline has said in the past that prices will fall from $5,000 per big flat TV last year, to something closer to $3,000 each now, and around $1,000 by 2008.

By then it will be an oversupplied market, with a big second-hand after market, too many manufacturers and a bundle of separate new entrants trying to grab market share. HP in this market has to rely on three things. By then it may have built something of a brand in television; it will have all the right instincts for making TVs that are entirely digital and which have all the right wireless and home network extensions and it has its own ability to operate just-in-time-manufacturing.

BTO, CTO

HP uses two approaches to fulfilling demand for product: build to order (BTO) and configuring to order (CTO).

Both BTO and CTO are designed to generate cost efficiencies relating to just-in-time manufacturing, inventory management and distribution practices. Just-in-time manufacturing reduces inventory by making or taking delivery of inventory from third-party suppliers, immediately prior to the sale or distribution of products to customers.There’s not much difference between HP’s approach and Dell’s except that Dell is a little faster at it than HP at the moment.

So HP won’t have to make TVs if no-one orders them.

Another leg that HP is relying on is a purely marketing one, announcing a tie up with MTV and inviting Judy McGrath, chairman and chief executive officer of MTV Networks onto the stage with Fiorina at the launch.

The formula is simple. The 137 million homes that have consumers aged 12 to 34 in them, which view MTV in some format every day, will get to see the HP brand as the sole photography and entertainment sponsor to MTV every time they turn the TV on. HP is also sponsoring the 2004 MTV Video Music Awards.

A last question that comes to us about the HP announcements and in particular the deal it has announced with Apple over the iPod, is just how does it make money on these devices?

The $299 and $399, 20 and 40 Gigabyte devices are the same price that Apple sells and makes the devices for. The new devices are either made by Apple and shipped to HP, or they are made by HP using the same suppliers as Apple. As far as we can make out the two companies haven’t said which at this point.

In the first instance Apple will have to agree to make less profit on each device in order to let HP have some of the money, and in the second instance HP will have to agree to pay something to Apple on each sale. This dilutes the profitability of each machine for Apple too, so we remain baffled as to just what the two get from the deal.

Getting tattoed up

One innovation that HP is bringing is to print tattoos that fit over the iPod to personalize it using album cover art from top bands. You can even create your own tattoos using a HP printer. Printers again. Finally HP also announced new versions of PCs to run Microsoft’s XP Digital Media Center software and called it the HP Digital Entertainment Center, along with wireless LAN Extender products, again defined by Microsoft, that deliver content wirelessly from the HP Digital Entertainment Center to any TV in the house. One of the new PCs is the HP Pavilion dv1000 Series Entertainment Notebook which includes HP's new QuickPlay feature, which allows consumers to watch DVDs or listen to music without waiting for the machine to boot up.

Earlier this month HP announced a deal with Philips to offer a Video Content Protection System for signals broadcast on free to air television using the FCC mandated Broadcast Flag. The two companies said they will begin licensing the technology to other manufacturers. VCPS lets consumers record digital TV signals and is designed for use with DVD+R and DVD+RW disks.

VCPS encrypts video recordings when it writes them on DVD+R and DVD+RW disks. In effect VCPS enables “copy-once” but does not allow “copy again” when a TV broadcast flag is set.

This is more this type of intellectual property based innovation that HP will need to establish, if its name to be reckoned with in digital media technology, not merely pumping up the volume on media advertising, OEM supplying of Far East built technology and delivering me too products from neighbors like Apple.

Copyright © 2004, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of events that have happened each week in the world of digital media. Faultline is where media meets technology. Subscription details here.

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