Xerox and HP set to square up, again

Xerox's history is one of innovation married to often dismal commercial execution. So what happens when rival HP starts eyeing Xerox's latest target market? Sonya Rabbitte investigates...

Ten years of product development and three years of strategic planning preceded Xeroxes highly publicised launch into the Soho (small office, home office) market. With a global value of $54bn, the small office and home print sector seemed like a sure-fire gamble.

Yet last month, just six months after the initial launch, the troubled document management company quietly withdrew from the Soho market after clocking up an $82m loss on sales of $139m.

But with plans afoot to pull out of one market, Xerox was already investing 40 per cent of its total R&D budget in another.

Since the mid-90s, the company has been working to capture market share in the digital graphic arts sector. Its confidence in its market position was confirmed earlier this year with a $715m investment - two-fifths of the company's total R&D budget - in the FutureColour printer range.

Xerox now holds a seven to eight per cent share of the digital graphic arts market, but claims to have 35 to 40 per cent market penetration - in other words, over one third of the equipment and accessories used in the market are produced by Xerox.

"If you're going to be successful in this market you have to understand it. You have to get under the skin of the industry," said Peter Vincent, head of UK marketing with Xerox's Graphic Arts division.

Xerox claims this is exactly what it has done. Its graphic arts division now offers a full range of printing services from creative content management through to post production facilities.

Through a network of specialised print partners and dedicated printing technology Xerox is positioning itself as a direct competitor to traditional offset printers, claiming it can tackle any colour print job from books to advertising flyers.

For a company that spent most of 2000 bailing out of China, sub-letting R&D facilities and selling off assets, investing 40 per cent of its research budget in colour printing is a make or break gamble. IDC research analyst Paul Whittington claims it is a shrewd move.

"For Xerox not to invest would be quite short-sighted. This is a growing market. They have to be careful though that they translate this investment into products they bring to market, and use the opportunity to improve cash flow through sales," he said.

With the graphic arts market measured at a printable 110 to 115 billion page impressions a year in volume the scope for generating business is high. Xerox claims to earn 40 per cent of its total annual revenue in this sector, a point that is obviously not missed on rival HP, which is now gunning for a piece of the action.

HP's approach is two pronged. It is already trialling an outsourcing programme based on Xerox's facilities management offering, which manages and maintains print services for large corporations.

When this takes off HP intends to capture a share in the digital colour print market, utilising the technology it acquired through last year's take over of Indigo. The outsourcing programme will be expanded to include digital colour printing.

There are valid reasons for HP to branch into this market. It already runs a similar service for the SME market - the Print Advantage programme. The high-end market incarnation is the Digital Workplace Service programme and Peter Urey, UK hardcopy manager with HP, is not shy to admit the strategy is based on the Xerox approach.

"We are mimicking the Xerox model. They currently own the [high-end] space. But we could steal this market from them," he said.

The reasons for the diversification are simple: the high-end market is profitable, the digital colour market has the potential to be extremely lucrative, and profit is important as HP revenue growth is squeezed.

By the first quarter of 2001, this sector's revenue had dropped 12 per cent on the year ago period to $727m. In Q2, year-on-year revenue was down 50 per cent to $356m.

HP has every reason to go head-to-head with Xerox in this market. According to Urey, there are a lot of research projects on the path to becoming real products. HP currently holds a six per cent share in the commercial print market. Urey is aiming to up this within 18 months.

But Xerox's Vincent remains surprisingly amicable about HP's arrival on the market.

"I wouldn't take their presence lightly. It will be interesting to see how it evolves, but we have an expertise level well beyond them," he said.

HP is simply another player in the market and a very new and inexperienced one at that, he claims. Competition is nothing new. Threats already come from Canon, IBM and traditional offset printers Heidelberg.

One valid fear is that in an effort to drum up business, a new arrival could slash prices and fire up an all-out price war.

Vincent warns that in a market like digital graphic arts - where margins are so tight - new players like HP would be foolish to launch such an assault.

With HP's digital colour strategy still in its infancy, that argument remains hypothetical.

HP's Urey estimates his company will be encroaching on Xerox's market share within 18 months. Predictably, Vincent isn't so sure.

"We do something and people follow. That's a compliment. But HP definitely won't over-take us in the market. You need large scale operations, a lot of infrastructure and a lot of investment to make it work," he said.

We'll see.