Execs: HP's PC group in 'two-horse race' for 2003

After bringing its PC business back to profitability for the first time in several years, Hewlett-Packard Co. (HP) is setting its sights on rival PC vendor Dell Computer Corp. this year as its looks to maintain its slight edge in market share, executives said Friday in a conference call.

The Palo Alto, California, company discussed its work balancing a revamped distribution system that straddles the line between a reseller model and a direct sales model, and its newer products such as Media Center PCs, Tablet PCs and handhelds.

"This marketplace is coming down to a couple of major players, us and Dell," said Duane Zitzner, executive vice president of HP's personal systems group. HP narrowly edged out Dell in terms of worldwide PC shipments in the fourth quarter according to market research from both Dataquest Inc. and IDC. Both companies sold about 4 million more units in the fourth quarter than the third place company, IBM Corp.

HP's Media Center PCs have exceeded expectations, Zitzner said, although he declined to provide specific figures. Sales of those PCs with Microsoft Corp.'s Windows XP Media Center Edition operating system have remained strong into the new year even after the consumer buying crunch of the holiday season, he said. Media Center PCs allow users to control their home entertainment functions from their PC, such as recording and pausing live television, and video editing.

Over the next few weeks, HP will roll out Media Center PCs with new features and capabilities, Zitzner said. Media-oriented features and applications have been a common theme across new PCs over the last few months.

The Media Center PCs are targeted at consumers, but HP is also courting enterprise customers with its Tablet PC and iPaq handhelds. The company has been pleased with sales of the Compaq TC1000 Tablet PC, and the recently introduced iPaq 5450 with 802.11b wireless Internet access capability has attracted attention with its built-in fingerprint reader, Zitzner said.

If HP is to remain competitive for the rest of the year, it needs to continue to price its products aggressively and come up with innovative designs, Zitzner said. "The cost savings (from the Compaq acquisition) are allowing us to price competitively without sacrificing innovation," he said.

Dell's direct sales practice allows the company to operate a very lean distribution model, but that stifles innovation, said Jim McDonnell, senior vice president of the personal systems group.

"We're driving innovation in this industry. We're not Dell, and we're not going to be Dell," he said.

There are two sides to the debate over the first-mover approach of HP versus Dell's late entrances into established markets, said Roger Kay, director of client computing at IDC, in Framingham, Massachusetts.

"Dell lets others establish the market and take the risks, and then comes in and sets commodity prices. But the iPaq shows that HP's risk to go early into a market paid off," he said. The iPaq was the second-most popular handheld in terms of shipments in the fourth quarter, and enjoyed a strong lead among Pocket PC devices, according to recent research from Dataquest.

HP is committed to its resellers as a distribution channel for the enterprise market, and will continue to sell its PCs at retail as well, Zitzner said. However, the company is ramping up its direct Web site sales program, which is a key part of its distribution strategy, he said.

HP's PartnerOne program consolidates the Compaq and HP approaches to resellers into a new program that provides incentives for resellers to stimulate demand, Zitzner said. It was introduced last November.

Both direct and reseller models are needed to satisfy different types of enterprise customers, Kay said. Dell sells a lot of products through distributor Ingram Micro Inc., and HP has added Compaq's relative success in a direct distribution model to its historical strength in the channel, he said.

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