Dell's divorce club may be growing

There was a time when Dell had several so-called preferred partners, including Hewlett-Packard, in the printer space. Not anymore.
Written by David Berlind, Inactive
The dust is finally settling from Dell's decision to select Lexmark as its exclusive preferred partner for printers.

Here's the way Dell operates: It establishes relationships with preferred partners to provide products that are complementary to its native offerings. Printers, for example, go well with the computers it sells, and Dell doesn't manufacture its own printers. In cases like this, the company aligns itself with one or more manufacturers of the complementary products and calls those manufacturers "preferred partners." There was a time when Dell had several so-called preferred partners, including Hewlett-Packard, in the printer space.

Not anymore.

In September, Dell made official its intentions to go head to head against printer manufacturers by selling Dell-branded printers, and it gave Lexmark the dubious honor of serving as the exclusive original equipment manufacturer (OEM) of those printers. The decision came at the expense of a long-running relationship that HP had with Dell as one of several preferred printer partners that included Xerox, Epson, and Canon. When HP got wind in July of Dell's plans to enter the printer market with Dell-branded printers, it abruptly severed ties with the Austin, Texas-based PC Maker.

But to enter a market in which Dell had no manufacturing background, the company would need a partner. Lexmark got the nod.

Although officials from both companies have been tight-lipped about the business terms of the deal, I'm certain that Dell wants to profit from printers in the same way that it profits from computers. As I discussed in a previous column regarding Dell's entry into the handheld market, Dell profits more from being a bank than it does from being a computer company. Given the emphasis on inventory control in Dell's business model, I suspect that Lexmark will be treated the same as any of Dell's other providers of raw materials: Dell will take delivery of printers as well as consumables within as little as four days of the finished product being shipped to a customer.

Provided customers respond favorably to Dell's offering, the question is: In order to squeeze even more margin out of its printer sales, will Dell take the next logical step and make the printers itself?

Dell has used other companies to make its markets in this way. After developing itself as a channel for networking equipment by reselling products from 3Com and Cisco, Dell started to sell its own networking gear. Whereas HP cut off diplomatic relations before Dell even entered the printer market, 3Com and Cisco waited until Dell's PowerConnect line of networking gear became a threat to their own businesses. Once both companies had acknowledged that Dell was real competition, Cisco turned off Dell in early September and 3Com wasn't far behind.

As long as Dell doesn't make its own printers, Lexmark has nothing to fear. But the minute Dell decides that it wants to own the market that Lexmark helped it to make, then Lexmark will very likely end up joining 3Com, Cisco, and HP in the Dell divorcee club.

What are the odds of this happening? In my discussions with the company, Dell has emphasized the difference between its relationship with Lexmark and the relationships it had with 3Com and Cisco. In the case of the networking vendors, Dell never private-labeled their gear the way it's branding Lexmark's printers. Dell also notes that it never had an exclusive preferred provider for networking gear the way it now does for printers.

Even so, a Dell spokesperson says, "Would we manufacture printers ourselves? It's possible. If we can offer our customers a more attractive price, we'd do it."

And what does Lexmark have to say about the risk of it being used as Dell's market maker? According to a Lexmark spokesperson, "We are pleased to have been selected as Dell's initial printing partner. Whether they will ultimately go in the printer category [on their own] is something they may be pondering, but only Dell knows its strategies and future plans. As for Lexmark, we are pleased with the evolution of our two-year-old relationship with Dell, but our focus is on growing the company through expansion of the Lexmark brand. All of our OEM relationships combined account for less than 10 percent of our business, and no single customer accounts for more than 5 percent, so clearly our focus has been -- and remains -- on expanding the installed base of Lexmark-branded products."

Depending on just how much Dell is able to help Lexmark expand the installed based of its products, one beneficial side effect should either company ditch the other could be an improved consumables business for Lexmark. As a result, if the two do end up going their separate ways, the companies likely will have used each other in ways that were mutually beneficial.

What do you think? TalkBack below or e-mail me.

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