HP quits supplying printers to Dell

HP spokeswoman Diane Roncal told CNET News.com that the company notified Dell of its plans on Tuesday morning.

"The basis for the relationship is no longer valid, given the company's intent to sell Dell-branded printers," Roncal said.

Roncal said Dell's business represented an "insignificant" portion of HP's total printing and imaging business, equal to only a few days' sales per year. Roncal said the company is in discussions with other resellers to pick up the sales.

Dell currently offers HP's printers, scanners and digital cameras as well as its Jornada handhelds for sale on the Dell Web site. It has been widely speculated that Dell is planning to enter the printer business, although the company has not laid out its plans.

Dell spokesman Mike Maher said the company was surprised by HP's move.

"We're befuddled that the mere possibility of us entering the printer business would make them so nervous," Maher said. "It seems counterintuitive that in this market you would want to make it harder for customers to get your products."

The move will have no material impact on Dell's finances, Maher said. The PC maker, he said, has direct relationships with Xerox, Lexmark, Canon and Brother, and if customers want HP printers, Dell will continue to offer them by purchasing them through the distribution channel.

Dell is still evaluating its options as far as its own brand of printers is concerned, Maher said. Dell President Kevin Rollins told the Austin American-Statesman last week that the company is likely to be in the market by the end of the year.

"My guess is sometime soon, you'll see us in the printer business...with a Dell-branded printer. Probably by the end of the year, you'll see something," Rollins said.

HP, the world's largest printer maker, and Dell, now the No. 2 PC maker behind HP, once enjoyed a fairly close relationship when it came to printers. Dell was one of HP's largest sales outlets, according to sources. HP resellers often expressed dismay over the relationship because assisting Dell, they said, potentially cut into their own business.

Since the HP-Compaq merger was announced, however, Dell has increasingly begun to buy printers from Lexmark and other HP competitors. In a similar fashion, after Compaq bought Digital in 1998, Dell replaced Digital as its field service provider.

Dell began selling HP products in 1998.

Both PC makers lose
Analysts say that the relationship between the two companies, while contentious at times, had offered benefits to both.

"Both companies are going to suffer from this," said Gary Peterson, director of research for market researcher ARS. "Dell, like it or not, is a pretty big reseller of HP products. HP is going to miss that."

At the same time, Peterson said, HP has been a significant supplier to Dell and noted that it owes a fraction of its PC sales to the fact that it has been able to bundle HP printers.

"Dell is going to be missing HP a great deal," he said.

It's too early to predict how Dell would fare with its printers, said Bear Stearns analyst Andy Neff.

"This is still a war on paper only at this point--Dell does not have printers yet (and it) needs to detail its plans and execute those plans," Neff said in a note to clients.

Merrill Lynch analyst Steven Milunovich estimated that HP printers sold through Dell represent approximately 3 percent of HP's $9 billion in imaging hardware sales, but said that other partners could quickly make up for that $300 million in lost sales.

Lucrative ink sales are Dell's key motivation for entering the printer market, but Milunovich questioned whether Dell would be able to persuade consumers to buy printer cartridges by phone or over the Internet.

"The vast majority of supplies are bought through retail, not over the Web," Milunovich said.

However, Neff said that it may be premature to count Dell out.

"As to the conventional thinking that 'no one will buy ink cartridges direct,' one could have said the same about PCs 10 years ago," Neff said.

Lexmark is likely on the short list of companies with which Dell might partner, a list that could also include Xerox, Epson and Canon, Neff said. "Dell will push for favorable economic terms from a vendor and may choose more than one vendor (i.e., one for laser, one for inkjet)."

Peterson said he expects Dell to offer both inkjet and laser printers under its own brand, and to aim largely for low-end models that it can bundle with its PCs.

"They are going to have a minimal impact on the market," Peterson said. "What people don't understand is that HP is the Microsoft of the printer world. To think that Dell is going to get even 10 percent of the market is preposterous."

News.com's Michael Kanellos contributed to this report.