The Printer King Invades Home P Cs

Ever since sales of Hewlett-Packard Co.'s personal-computer printers began to soar in the late 1980s, HP Vice-President Richard E. Belluzzo felt the company would one day push off from its roots as a maker of geeky lab equipment and engineering computers to tackle a wide range of consumer-electronics products. Now Belluzzo is making his move: On Aug. 14, the new HP Pavilion line of home PCs will go on sale at nine major retail chains, and they look set to make quite a splash. "HP, Compaq, and Packard Bell will definitely be the top three this Christmas," says Alan C. Bush, president of the Computer City superstore chain. "There's no doubt about it."

No question, Hewlett-Packard, a $25 billion high-tech giant, is quickly gaining on the world's top PC makers. It came from nowhere just a few years ago to take the No.6 position in PC sales during this year's second quarter, according to market researcher Dataquest Inc. What's more, HP grew 55% while the average for the top five manufacturers was 28%. This despite the fact that the company is barely a presence in the consumer markets.

For now, that is. HP's push into home PCs is just the starting point of a long- term effort aimed at winning the hearts and minds of consumers. The Palo Alto (Calif.) company wants a piece of all sorts of consumer markets, from low-cost peripherals such as cable modems and scanners to sophisticated set-top TV boxes and PC networks for the home. Those fast-growing consumer businesses are critical if HP is to continue enjoying the 20% growth rates it has posted for each of the past two years.

"ISSUE OF SURVIVAL." Not that the company isn't making big gains in many of its traditional markets. It owns a leading 38% share of the $3.5 billion printer market and is holding steady in the more mature calculator business. Sales of its UNIX-based midrange computers are up 60% so far this year. But do the math: Analysts say home PC sales are growing some 25% a year, making it the fastest-growing electronics market out there. Corporate PC sales--largely a replacement market--are growing at about 16%. "We need consumers," says HP Belluzzo, a 42-year-old known as "Rocket Rick" for his rapid ascent to the top of the $15 billion-plus PC and printer businesses. "It's an issue of survival."

HP started addressing this issue last October, when it first decided to get in on the home-PC boom. From there it moved fast, creating its Home Products Div. in November and getting products into stores for sales trials by March. The division, while growing, still has fewer than 100 people, but it has big dreams. Webb McKinney, general manager of Home Products, figures he can sell 250,000 home PCs this year--ensuring HP the No.3 ranking in the market. What's more, Webb believes HP can beat the likes of Packard Bell Electronics Inc. while still charging a 10% premium price. His reasoning: HP WIll trade on its top-drawer brand name and reputation for good service and reliability. "We have that virtuous kind of name that sells itself," crows McKinney.

Competitors aren't disagreeing. With HP's LaserJet and InkJet printers already staples in many of the same retailers that will carry its PCs, "they definitely have brand name and existing relations with retailers going for them," admits Mal Ransom, Packard Bell's marketing vice-president. Rodney Schrock, Compaq's vice-president for desktop marketing, expects HP to grab a respectable 3% to 5% market share in the U.S. home market in 1995. "HP is probably the only major new entrant this year, and long-term they look like a very strong, viable competitor," he says.

Consumers are rallying to HP as well. "I just respect the HP name," says Alameda (Calif.) retiree Richard Zachary, who bought an HP PC during a three-month pilot sales program held with the Circuit City Stores Inc. chain last spring. "HP may be new to the game, but it has been making computer products for a long time."

But HP's good name will only take it so far. HP will have to adapt to the complexity of the home-PC market. These machines come in far more configurations than printers and have life cycles measured in months rather than years. While retailers have no choice but to accept slim margins on HP's hugely popular printers, they'll have no such loyalty to the Pavilion if other lines are more profitable or popular with consumers.

Competitors are certainly winning the features contest. They are rushing out whiz-bang technologies for their home PCs that HP hasn't matched, such as Packard Bell's remote controls and Compaq's voice-recognition software. IBM is creating a whole new organization to build a wide range of feature-rich high-tech gear for consumers. Says Compaq's Schrock: "We have two years of experience [in the consumer market] that we're going to leverage to offer astounding features. It will be difficult for any new entrant to compete with that."

So far, though, HP has learned to copy its competitors' successes quickly. Adopting the thrifty ways that have helped Packard Bell become the latest PC juggernaut, HP says it will buy all of its motherboards for its Pentium models from Intel Corp. rather than design one of its own. The idea: Don't dump money into R&D that the chip king has already spent. And just as Compaq decided to farm out manufacturing of this year's low-end models to Taiwan-based Mitac International Corp., HP has hired Huntsville (Ala.)-based SCI Systems Inc. to assemble its systems. It has also hired an outside firm to handle calls to its 800 service lines.

This formula should give HP a powerful combination of marketing clout and operational efficiency. As a $25 billion company, HP's power to purchase scarce supplies of memory chips, CD-ROM drives, and other parts matches anyone's. And while it will have to share profits with Intel, SCI, and other partners, it won't be weighed down by, say, the cost of Compaq's 28 production lines.

BUILDING LOYALTY. Retailers, meanwhile, are eager for HP's arrival. Having been burned by other PC makers' inventory blunders in recent years--IBM, for one, severely underestimated demand for its PC products last year--"retailers want us to be successful," insists PC Marketing Manager James P. McDonnell. "They wouldn't have cared if IBM had executed well, but it didn't." To ingratiate themselves further, McKinney and team will quickly take back products returned to retailers by disgruntled shoppers--something most PC makers are loath to do. That may cost HP in the short term, says McKinney, but it will build retailer loyalty and provide early warning of product problems.

The care and feeding of retailers is just one of the ways HP is readying itself for a consumer-oriented future. On the drawing board, beyond PCs, are gizmos such as low-priced scanners for home PCs and TV set-top boxes. These will require all the marketing pizzazz that HP can muster. It's working on "digital darkrooms" with partner Eastman Kodak Co., for example, that may someday allow the average shutterbug to take digital pictures with special cameras and then crop, brighten, and finally print them out with high-resolution printers--all in the comfort of the living room. First, though, it has to break deep-seated consumer habits, not to mention the opposition of the entire photo-development industry.

HP's main consumer effort through all this will continue to be printers, its bread and butter. There it's gearing up for even more growth. Rather than keep up with monthly orders as they arrive, this spring HP began stockpiling inventories to meet its aggressive forecasts, just like mass producers of cars, food, and TVs. The plan may be risky--production is running 50% or so higher than last year, sources say--but it's necessary. Even though InkJet printer shipments will near 10 million this year, analysts figure HP has left some 10 points of market share on the table in recent years. Says InkJet Products Group General Manager Antonio M. Perez: "We're not going to lose any more share because of lack of capacity."

That means keeping demand on the rise, which in turn means putting a range of consumer sales tactics in place. While HP used to target some 80% of its advertising dollars to high-tech trade magazines, that same portion will now go into high-profile TV ads. Also, since 1993, HP has doubled the number of chains carrying its printer products, adding giants such as Wal-Mart Stores Inc. And to take the stress off its factories, it is switching from extravagant worldwide product launches to a series of regional introductions. Its new DeskJet 850, for example, started selling first in Europe to take advantage of slow regional summer sales.

"We probably should have made all these changes years ago," admits Perez. "But who knew the PC industry was going to go wacko like it has." A lesson to remember when trying to follow those wacky consumer trends.

Heading for the Home

Hewlett-Packard's Consumer Products

HOME PCs Snazzy new HP Pavilion PCs, ranging in price from $1,500 to $3,200, feature easy-to-use software to mask the complexity of Windows 95 and a software-based HP calculator.

ELECTRONIC PHOTO ALBUMS Working with Kodak, HP envisions a consumer market for PC-based equipment to view and print out photographs--after editing out red eyes, of course.

SCANNERS Now aimed at business customers, HP plans lower-priced versions to make this input device--used for capturing images and documents--a standard addition when shopping for a PC.

PRINTERS New low-end DeskJet printers offer color printing for under $300, while the new model 855C comes with software for inserting photos into documents.

INTERACTIVE-SERVICES GEAR Plans for set-top TV boxes are in the works. Meanwhile, HP claims to have orders for 1 million speedy modems from cable companies that want to offer PC users superfast Internet surfing via the same wire that delivers cable TV.