Hewlett-Packard branches out with joint venture to supply Apple iPods

Rethink IT, Oct, 2004

Hewlett-Packard got off another round of digital media products in September, including the long awaited joint venture to supply Apple iPods branded as HP devices, with most of the new devices hitting stores all over the world during September.

But listening in on the hoopla that made up the Hewlett-Packard megalaunch of yet more digital products (last year it launched 158 products in its first ever digital media slugfest), we were struck by one thought--that even after a year in the market, the only digital media product from HP that we can name is one that comes from another company, the Apple iPod.

The other brand names perhaps explain why, by name they are the Photosmart 375 Compact Photo Printer, the Photosmart 2710, the Photosmart 8450, the HP Photosmart R607 Digital Camera and the ep9010 Digital Projector. Okay, that's not all that the company launched, but let's deal with these first. The 375 prints photos on the move, the 2710 prints photos at home, the R607 takes digital photos and the ep9010 can, among other things, project your digital photos on the wall.

HP has even cut a deal with American Greetings, one of the two giants that along with Hallmark Cards, dominates the $4bn plus market for greeting cards. Don't buy them in a store, personalize them, then print them on one of the above devices using special inks and paper, again from HE

So, apart from the iPod, these announcements are just about printing and photos. Right?

Well, we hope not, for the sake of Hewlett-Packard, because although HP may win that particular battle (and we can't be sure that it will), it is not the big picture of the digital media war.

Oh, it's a profitable enough business area and it leverages from what HP already does well, but the promise that Carly Fiorina made on the stage at the launch, that homes everywhere can make photo prints for the same price as they can in the retail store, is probably not promise enough.

The release literature suggests that a print can be made with HP's new specialist paper, photo printers and with its specialists inks, at 29 cents a time. That may well be true and we are not about to check the math on it, but in the end the only advantage that customers are going to get from this is not taking film to the mall and waiting 24 hours for photos. Steps are already under way, primarily by Kodak, to create a photo market within the mobile phone. Phone-based cameras don't yet have sufficient image density to compete with true digital cameras, but they will in a few short years. After that point the route from the camera (phone) to home is shortened, and then printing out photos might be dominated by the company that dominates the phone cameras.

Kodak is the brand you'd associate with camera film dominance and it operates at around $13bn a year with a healthy chunk of that in medical imaging (another offshoot that might tempt HP, given its medical roots).

But Kodak is a company that had negative cash flow last year, has only $800m in cash, and $2.9bn in debt, which is also trying in transition itself into being a digital company, growing its Easyshare digital camera business, increasing its efforts to allow consumers to print photos at home and which is now offering to make film and materials for other suppliers. Sound familiar?

If HP wants that role in the digital economy, it is hardly going to make for deliriously happy shareholders.

No, the photos business is mostly nickels and dimes, it is a low margin business that we assume that HP is viewing like ink cartridges for laser printers, a permanent replacement business with a premium for the brand.

Compared to that $13bn of Kodak's it might do better to go after the flat TV screen market which, is already worth $15bn even though it currently only makes up 3m devices out of a 200m device a year TV market.

Well of course HP has also done just that, announcing new flat TVs backing both plasma and LCD screen technologies. But this has more than just one downside for HP too.

Every basic technology provider such as Samsung and Sony and Philips has both tried to introduce some new, cheaper to churn out technology, as well as ramp their existing technologies to around double the volumes they were last year.

In the TV market these companies are creating, the poor consumer is expected to replace his or her worn out TV set with a flat screen, wirelessly attached, HDTV playing TV, complete with bundled DVR and DVD writer. Or at least that's where we are likely to be in two to three years.

The fight is on to create the technology of choice for that future device, and two new entries, in Intel and Texas Instruments, have tried to join the TV component suppliers by experimenting with micro mirrors and Liquid Crystal on Silicon devices.

LG Philips has promised to spend about S21bn over the next 10 years making better and better, and cheaper and cheaper LCD screens.

Now, in a way this only benefits HE It's not playing in the genuine technology stakes. It's not its R&D that's at stake. All it does is take the best available technology from the cheapest supplier and put it in a device that it has designed for volume shipments to its existing retail partners. But there's not much margin in that.