June 18 (Bloomberg) -- Dell Inc. President Kevin Rollins plans to cut computer-printer prices in half and shave as much as 20 percent from the cost of printer supplies as he challenges Hewlett-Packard Co. in its most-profitable market.

``Our customers are telling us they've just been paying too much for ink and toner,'' Rollins said yesterday in an interview in Washington. ``It's frankly the most expensive liquid on the planet.''

Rollins, 51, helped build Round Rock, Texas-based Dell into the world's biggest personal-computer maker by slashing prices to steal sales from competitors. Now he's crafting plans to use what he calls ``the Dell effect'' to muscle in on a market that Hewlett-Packard Chief Executive Carly Fiorina relies on to supply almost 70 percent of her company's profit.

Dell added printers and supplies in March 2003 as PC prices fell, selling 2 million in its first year. Rollins, who succeeds founder Michael Dell as chief executive in a month, said he plans to cut printer prices 30 percent to 50 percent and ink costs 10 percent to 20 percent. He didn't offer a timeframe.

``Over three to five years, there's no reason Dell can't have the kind of market share of the imaging and printing market that they have in the personal computer market,'' said Jason Maxwell, an analyst at Los Angeles-based TCW Group Inc., which owned 28.9 million Dell shares as of March 31, the 11th-largest shareholder. ``Dell has a more efficient cost structure relevant to H-P. It's going to be a battle.''

Trimming Prices

Fiorina, 49, has trimmed prices to stem Dell's advance. Palo Alto, California-based Hewlett-Packard, the No. 1 printer maker, last month introduced what it says is the first color laser printer priced at less than $500. Hewlett-Packard spokesman Michael Moeller didn't returns calls seeking comment.

Hewlett-Packard printers sell from $39 to $1 million. Dell has focused on selling printers for less than $100.

Fiorina says Hewlett-Packard's spending on research in its printer unit, more than $1 billion a year, gives her an edge.

``The reason we are the best in this business is in large part because we deliver innovation,'' Fiorina said in a television interview last week in San Jose, California.

Shares of Dell fell 63 cents to $34.76 in Nasdaq Stock Market composite trading. They have gained 2.3 percent this year. Hewlett-Packard fell 41 cents to $21.09 and have fallen 8.2 percent this year.

``Rollins singled out H-P as Dell's main competitor in almost every market,'' Merrill Lynch analyst Steven Milunovich wrote in a report yesterday, a day after having a ``fireside chat'' with Rollins. ``H-P is enemy No. 1 in PCs, services, storage, and, of course, printers.''

Pace Quickens

Dell's sales rose 17 percent in its last fiscal year to $41.4 billion and are forecast to grow 19 percent this year, twice as fast Hewlett-Packard, according to Thomson Financial. Printers are a key part of keeping up the pace, Rollins said.

``H-P's a strong company; they've made a lot of money off selling ink to customers,'' Rollins said at a conference hosted by National Federation of Independent Business. ``But we believe customers will vote for value.''

Dell plans to work with companies that supply its inkjet and laser printers -- Lexmark International Inc., Eastman Kodak Co., Fuji Xerox Co. and Samsung Electronics Co. -- and others to ``figure out how to reduce costs, so that it doesn't come out of their margin, but it really makes the lower prices available to customers,'' Rollins said.

`Dell Effect'

The ``Dell effect,'' the company's model of selling directly to customers, will let him lower the cost of printing just as the company has done in PCs, servers and storage units, he said.

``Our goal is to reduce the cost of imaging wherever it lies,'' he said. ``It will take us a little bit of time to do that.''

Hewlett-Packard, which has been in the printer business for 20 years, says it ships 1 million printers a week.

``Dell is fundamentally not a technology company. They are a distribution company,'' Fiorina said. ``We also have a model to use direct distribution, and we do. But there are things that we do through technology that Dell simply can't do.''

Hewlett-Packard has an installed printer base of more than 312 million printers to whom it can sell the higher-margin printer supplies, Fiorina said. Dell has 2.8 million printers installed.

``In the short-term, the impact on H-P is not going to be material because Dell is coming from a very small installed base,'' said Jimmy Chang, a technology analyst at Rockefeller & Co., which manages $3.7 billion, including Dell and Hewlett- Packard shares. ``But you can never underestimate Dell's strength in this market.''

Making Money

The printing unit produced 69 percent of Hewlett-Packard's profit and 30 percent of sales in the latest quarter. High-margin printer supplies, such as ink and toner cartridges, account for more than 50 percent of its printer revenues, said Vyomesh Joshi, executive vice president of the printer and imaging group.

Hewlett-Packard has said the printer division's operating profit margin of 16 percent in the second quarter will probably decline as it cuts prices to stem competition.

Dell's printing business already is making ``a little money despite the difficulty of making a profit on hardware,'' Merrill's Milunovich wrote.

To contact the reporter on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net and Scott Lanman in Washington at (1) slanman@bloomberg.net.

Last Updated: June 18, 2004 00:05 EDT