Hp Pictures The Future

The king of computer printers is set to take on the likes of Kodak and Canon and carve out a chunk of the $40 billion photography market

It's summer, and gadget freaks are on the prowl in photo and electronics emporiums for a hot new camera to snag young Molly's first dive off the high board. The options are many: There's Eastman Kodak, of course, and Nikon, Canon, Hewlett-Packard. Hewlett-Packard? The printer guys? Say what? Say cheese, says HP--and then print out that smile right in the comfort of your own home.

Hewlett-Packard Co., the world's second-largest high-tech company, best known for its printers and precision instruments, is an unlikely player in the hotly competitive, $40 billion photography market. But get ready for a shootout. HP's recent debut of a new line of PhotoSmart digital photography gear is just the beginning of a bold new strategy that will pit it against the snapshot might of Kodak, Canon, Fuji, and other photo kings.

That's not to say that HP expects to sell a mountain of cameras right away

--or ever. Its $399 PhotoSmart digital camera is little more than a one-year-old model licensed from Konica Corp. that doesn't eclipse any of the camera heavyweights. Rather, HP's camera entry is part of a stealth approach aimed at turning its gear into the "home digital darkroom" of the future--printing out near lab-quality snaps, at home, in as much time as it takes to brew a cup of coffee.

If HP succeeds, this could shake up the photo-film industry and help revolutionize the way camera buffs and amateurs alike develop, distribute, even use what we will increasingly call "images" rather than photos. Crows HP's ordinarily staid chief executive, Lewis E. Platt: "It will fundamentally change the way people think about photography."

No more schlepping to the photo store. No more trips back for duplicate prints. And, thanks to the global reach of the Internet, no more dropping those prized pictures into an envelope that you keep forgetting to mail to the relatives. PhotoSmart users are already getting a glimpse of what lies ahead. Since May, these customers have not only been snapping digital pictures but also plugging existing photos, slides, and negatives into a personal computer with HP's $499 PhotoSmart scanner. Then, with a click of the mouse, the $499 PhotoSmart printer spits out a crisp snap.

And that's just the start. Next year, HP will push further into photo territory when it delivers a printer that can download pictures direct from a digital camera--no more mucking around with a PC. And then comes a battery of other whizzy devices over the next few years, including a "digital mailbox" that will attach to the Net so you can zap photos and other images into the homes of your far-flung family; and a camera-cellular phone combo for taking snaps of Timmy's game-winning homer and speeding them over the Net and into Grandma's hands before he even takes off his muddy cleats.

Then there's what HP has planned on the photo front for businesses. Over the next decade, the Silicon Valley giant plans to leverage its expertise in computing, its commanding market share in printing, and batches of new Net technologies simmering in its labs to turn today's workaday PC printer into the catchall printing press of the Information Age--churning out everything from professional quality posters to brochures for electronic publishers.

"HP MOMENT?" Has HP, the mild-mannered high-tech company known for its pocket-protector culture and gentlemanly ways, gone bonkers? Without question, this will be an uphill battle. HP may be the premier PC printer company, but it has yet to prove itself beyond the computer-savvy crowd. For this strategy to take hold, HP must not only learn the ropes of the mass consumer market--which is already strewn with generations of yellow-and-black film boxes--but it must persuade consumers to change their old photo ways. Just so, says Kodak CEO George M.C. Fisher. "I find the idea that HP is somehow going to take over photography somewhat humorous," he snorts. "People know what a Kodak moment is, but an HP moment? I don't think so."

He has a point. While Fisher concedes new, low-cost printers from HP "will validate the market for desktop photography," he is adamant that Kodak--not HP--is the company best poised to reap the benefits of a photo revolution. For one thing, Kodak is putting more than $500 million a year into digital photography--about 10 times HP's investment. And Kodak offers a range of digital cameras, including the much-lauded $999 DC120.

What's more, Kodak is no slouch when it comes to the picture possibilities in cyberspace. The photo giant is planning a host of new digital products that include a Net-based service due out this year called Kodak Picture Network. This service will let Netizens store their photos on the Web for a $4.95 monthly fee so friends can then view or download them. "It's going to be an explosive business, and we're going to be a primary source," vows Fisher.

But not the printing source, counters Platt. This is Kodak's blind spot. Although the photo giant offers more than 100 digital products, it has no home printer. Fisher, however, says Kodak might one day make a printer or license an existing model to resell under its own name should the home photo-quality printer market take off.

BILLIONS OF SNAPS. HP has no doubt it will. HP is convinced digital photography will be a red-hot market--but not one that destroys the old-fashioned way of taking snaps. Indeed, HP expects that digital techniques will expand the number of photos from 60 billion a year today to hundreds of billions in five years. By then, 50% will be printed at home, says HP's Vyomesh Joshi, general manager of the home imaging division. And HP, natch, is banking its printers will handle the bulk of them.

Sound far-fetched? Not when you consider HP's track record for turning niches into huge markets. Take inkjet printing. In the early 1980s, it was messy and inferior, but HP kept tweaking it, developing retail outlets, and hammering at costs. Today, HP is the No.1 maker of inkjet printers, an $8.6 billion market in 1996, which accounted for 70% of all computer printers sold. And then there's desktop publishing. When HP leapt in with laser printers in the mid-1980s, commercial printers laughed. But within a few years, small businesses and consumers were dashing off newsletters and party invitations. "Once you put technology in people's hands, they will find more things to do than you can imagine," says Joshi.

Besides, to hear Platt tell it, HP can win big even if competitors don't lose. HP is ramping up spending for its grand scheme: The inkjet division, which is at the heart of its imaging plan, expects to more than double its plant, research and development, and marketing investment, to $7.5 billion, over the next four years. But Platt says HP would have spent much of that on its printers anyway. So, even if digital photography doesn't gobble up the film and photo-processing market, just a 5% to 10% share would be a boost for HP. "I don't know if digital photography will ever be 90% of the market," says HP Chief Financial Officer Robert P. Wayman. "But the opportunity is so big, I don't care."

HP could use a boost. Faced with slowing growth in its core printing business and lackluster performance from its computers, the company is feeling the heat. Wall Street drove its shares down 11%, to 52, following the May 16 announcement that revenue growth for the second quarter had slowed to just 5%, from 33% in the same quarter a year ago--its fourth disappointing quarter in a row. In part, HP is a victim of its own success: It claims 45% of the inkjet printer market--double that of its closest competitor, Canon. And in laser printers, it has a staggering 62% share. "They've got the Campbell's Soup problem," says Morgan Stanley & Co. analyst Steven M. Milunovich. "They own their categories."

And overall growth in those categories is slowing. Printer sales growth dropped to 6% in 1996, from 16% the previous year, according to International Data Corp. An even bigger problem: Falling prices for inkjet printers lowered HP's revenue growth last year, even though unit sales grew by 40%.

That's why HP is pulling out the stops to drive up printer usage. It's marketing as never before to its 50 million current customers to get them to soak up more ink and paper each year. And the company is exploring every possible imaging opportunity, from digital photography to the tiniest of niches--like bakery supplier Sweet Art Co., of Lenexa, Kan., which sells printers for decorating cakes.

What's behind all this razzle-dazzle? Credit the inkjet printer technology developed decades ago but improved upon by an HP skunkworks team holed up in a mop closet. It may seem humdrum, but inkjet cartridges are based on supersophisticated technology: They use semiconductors to heat hundreds of tiny chambers of ink until a bubble grows and bursts, forcing ink out a nozzle no wider than a fraction of a human hair. This technology has gone through a metamorphosis involving increasingly efficient and reliable micromechanics and high-speed manufacturing, thanks to HP's investment of more than $500 million each year. Although Epson America Inc. has a related technology called Piezo that can now put down more dots per inch than HP's thermal inkjet process, HP's reliability has helped it dominate the desktop printer market.

Now the inkjet cartridge is not only at the heart of the PhotoSmart printer, but it's the key weapon in the bulk of new imaging products HP is planning. And that, say HP execs, could lead to an ink-and-paper cash cow that would make Coca-Cola Co. or Gillette Co. proud. In 1996, printers accounted for an estimated $11.6 billion in revenues, or 30% of HP's $38.4 billion in total sales. If all goes as HP plans, analysts say, HP's printer business could grow 15% each year over the next five years.

MEGA MARGINS. But the real payoff is in printer paper and ink. Consider this: A snapshot uses 10 times the ink of an average text page, and an 8-by-10-inch picture uses 20 times the ink. Today, inkjet supplies are just 5% of HP's revenues, say analysts. But, with gross margins of 67%, vs. 33% for the overall company, they account for a stunning 25% of HP's profits. If HP executes its grand plan, the paper and ink business could grow 50% a year over the next two years, says analyst John B. Jones Jr. of Salomon Brothers Inc. "If we can get people to print one extra color page a week, we can double the size of our paper and ink business," says Srinivas Sukumar, head of HP's Internet Imaging group.

That has some experts salivating. While the company's sales growth dropped to between 5% and 12% in the past three quarters, CFO Wayman says inkjet printing, along with a new push in enterprise computing, could fuel annual growth of 16% to 19% for the next five years. At that rate, says analyst Jones, HP could supplant IBM as the largest tech company by 2004.

It will take much to get there. This strategy not only requires flawless execution, but HP's technical wizards must crank out new products at a furious pace to keep its paper-and-ink gold mine on the upswing. Inkjet chief Antonio M. Perez vows that by 2000, HP's portfolio of inkjet printers will triple, to 150, including kids' models and futuristic designs now in HP's labs.

The newest addition: a DeskJet that's designed to work with Microsoft Corp.'s WebTV settop box rather than a PC. With this printer, due out this year, even neophytes surfing the World Wide Web can plan an evening out by quickly finding and then printing out a current movie guide. HP is hoping to make that as easy as flipping channels by working with TV manufacturers to add a "print" button as a standard remote control feature.

OLD HABITS. But perhaps the biggest challenge to this new imaging push is that HP's marketers must start thinking like sneaker and soda-pop peddlers. That's because success will mean not only providing cool tools but making sure they aren't so complicated that customers get spooked. The early returns on the PhotoSmart line, for example, show kudos for the devices' high quality, but even HP has admitted the scanner is a headache to hook up. Andrew E. Tallian, HP's North American consumer marketing manager, says that HP has a lot to learn about talking directly to consumers. "We're like Neanderthals," he says.

Even if HP figures out how to cater to the masses, it may still be thwarted by entrenched consumer habits. Instead of dropping film off at the photo store, HP is convinced you'll prefer to zap your snaps into a home printer. And then there's getting consumers to routinely use the Net to swap photos with loved ones. Ridiculous, says Hirozo Ueda, executive vice-president of Fuji Photo Film Co. "People don't have so much time to mess around with home printing," he says.

Today, digital photo gear is a $3 billion business--just a fraction of the total photo market, according to CAP Ventures Inc. That has as much to do with technology as it does consumer habits. For starters, digital cameras have been no match for their low-tech brethren--and won't be for at least five years, say analysts. Even pictures taken with Kodak's DC120 camera have just 1 million pixels, far short of the 20 million in the average 35 millimeter snapshot. And HP's 360,000-pixel PhotoSmart camera is even worse. What's more, digital prints tend to fade in direct sun, and they're more expensive: A 4-by-6-inch silver halide print costs 8 cents, vs. 50 cents for a PhotoSmart snapshot.

But behind the scenes, HP is hard at work on fixes. Insiders say it has a digital camera-printer combo in the labs that will break the 1 million-pixel mark for $1,000 next year. And HP's paper unit is huddling with ink makers on longer-lasting inks. HP execs also insist that getting the cost of a digital print below silver halide is just a matter of time. "After all, they have to use silver, and we don't," says HP's Joshi. There are signs PC owners are primed to give home photography a shot. A study of 19,000 households by IDC shows the number of PC owners who want to use their computers to store pictures rose from 4% in 1995 to 9% in 1996 and could hit 18% this year.

HP also is doing some heavy lifting to get more high-resolution images onto the Net. Today, most online images are grainy pictures with just 72 bits of information--any more would mean long waits for irritated Web surfers. So HP joined with Kodak, Microsoft, and Live Picture, a Scotts Valley, Calif., software maker, to develop a technology called FlashPix that hit the market last summer. FlashPix enables an image to be sent over the Net in any of four levels of resolution--giving Netizens a choice. That wipes out the frustration for unknowing Web surfers and encourages Web-site operators to post the snazzy stuff.

NO-BRAINER. Now HP is going a step further, with a set of technologies code-named OpenPix. With these, software developers, who create all those digital images, will no longer have to convert their existing creations into a special FlashPix format. Instead, OpenPix makes the millions of existing computer images Net-ready.

Such technologies are crucial to HP's grand plan for widespread electronic distribution of all types of images via the Web. Today, for example, HP is trying to find ways to help publishers of everything from junk mail to glossy magazines deliver their goods online. For some businesses, it's a no-brainer. Electronic delivery would wipe out postage, printing, and distribution costs. And, since there's no need for setup time on printing presses, publishers could quickly customize their offerings--say a car brochure with all the models in a customer's favorite color.

To help make this a reality, HP plans to roll out a new technology in August called JetSend, which will extend home and small-business printing to the masses who don't own PCs. JetSend-compatible printers will attach directly to a phone line and have a Net E-mail address, just like a PC. "My customers wouldn't even have to log on," says Stephanie Serrino, business manager of The New York Times' TimesFax service, which delivers an 8-page synopsis of the newspaper to subscribers. Unlike a fax, the material will print in high resolution and in color--and for the publisher, it's a free call, just like E-mail.

HP believes customers are hungry for this kind of convenience. So starting this summer, execs-on-the-go will be able to drop into one of the 150 Kinko's outlets across the country that have HP large-format printers, download their design work off the Net, and print it. No more lugging poster-size presentations on the plane--just pick them up at the local copy shop when you get where you're going. The oversize color printing market "is a $10 billion business for somebody by 2000, and we're going to get it with HP," vows Wendell Wilson, operations chief of Kinko's Inc.

That's just a slice of what the Net makes possible. HP is noodling smart-card equipped kiosks for airports and malls, for example, so executive road warriors can collect printouts of their daily E-mail, magazine articles, or directions to their hotel--all with the swipe of a credit card. HP's Apr. 23 acquisition of smart-card device company VeriFone Inc. was a major step toward making this a reality. "We may have 50% share of the PC printer market today, but we have only 1% to 2% of the printing opportunity," says HP's Perez.

Part and parcel of expanding in both the consumer and small-business markets is making these products more visible and available. In a recent deal with retailer Fred Meyer Inc. in Seattle, HP inkjet cartridges are now stocked along with gift wrap and phone cords. Indeed, HP plans to make inkjet cartridges as easy to find as film by expanding distribution from 7,000 computer and office supply stores today to 100,000 or more outlets by 2002, including groceries, pharmacies, and department stores. Of course, that will only work if HP can cut cartridge costs from around $30 today to a price more in line with film. "We have to make inkjet printing dirt cheap," says Perez.

And this fall, HP plans to unveil a campaign to shift its reputation as a reliable nerd into something more akin to General Electric Co.'s "We bring good things to life." An early peek at this new HP came on June 25 at Pier 59 Studios when it marched out comedian Penn Jillette and lookalikes of Jerry Seinfeld and pal Elaine to pitch HP's grand imaging plan. "It's not exactly naked dancing girls, but it's a different approach for HP," says Internet marketing chief William J. Murphy.

Not only different, it could be the start of an ambitious new strategy to define an HP moment.

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