HP Rattles Reseller Partners

Hewlett-Packard has become the No. 6 personal computer manufacturer in the world, spurred by 55 percent growth for its most recent quarter, compared with the same quarter last year. Now the company has launched a major push into consumer markets with the introduction of the new Pavilion line, which the company announced Aug. 14.

Steve Seashorltz, sales manager for AAA Networks, a HP-authorized reseller in Fall Church, Va., says his firm has no interest in the Pavilion line, and that it specializes in corporate and government customers. "There are too many people [serving the consumer market].... The margins are too thin to allow us to stay in business."

Arlington, Va.'s Advanced Computer Concepts, a $50 million value-added reseller, has served business customers in the Washington, D.C., area since its founding in 1982. The firm has been an HP authorized reseller for more than 10 years, according to President Sam Zarafshar. He said Pavilion has impressive features, such as Windows 95, multimedia capabilities and a one-year on-site service warranty. However, he cites complaints from business users about long waits on HP's (800) number for service, and those customers' difficulty in getting problems resolved.

"How will they handle the influx of calls [from Pavilion owners]?" he asks. "I hope they're not leaving behind the high-end business market and going into the consumer market" full force and neglecting to spend sufficient research and development money on the higher-end markets, Zarafshar said.

In particular, Zarafshar said HP has ceded market leadership in the color printer market to Tektronix. "Instead, they're coming up with a response to Packard Bell," the low-end consumer PC supplier that has become the No. 1 manufacturer in the U.S. "There's a lot of growth in the home market, but it doesn't require a lot of technical advancement.... [HP] is trying to compete with the low-end mass merchant products.... I want to see advancement in our industry, but I'm disappointed with this."

Zarafshar would prefer that HP spend more effort and money promoting and improving its OmniBook notebook, palm-top PCs, file servers and higher end desktop lines. He thinks HP risks overextending itself. When asked about Compaq Computer Corp. and its ability to become the No. 1 worldwide computer manufacturer due to strong sales in the consumer and corporate markets, Zarafshar pointed out that Compaq sold its printer business and concentrated on producing PCs, while HP has continued to manufacture office products and printers, in addition to PCs.

Supporters, however, assert that while HP has strong engineering and technological strengths, the company exists to make a profit. They point to the flat growth in the color printer market as a primary reason for the company's lack of interest in it. HP's entry into the higher-end business PC market in 1993 failed miserably, and the firm had difficulty breaking into the top 20 of PC manufacturers. To continue to grow, HP Vice President Richard E. Belluzzo said, "We need consumers. It's a matter of survival."

Industry trends suggest the wisdom of that approach. While worldwide growth in the personal computer market has averaged approximately 28 percent this year, HP has nearly doubled its growth through leveraging its reseller partnerships, pursuing the superstore market and improving the design of its PCs. The corporate PC market, by contrast, has grown only 16 percent, so HP must expand its strategy to sustain its rocketing growth. In the second quarter of 1995, which ended June 30, HP shipped more than 520,000 personal computers.

Not all resellers are concerned. Andrew Kaplan, co-owner of Clinton Computer Inc., a $12 million value-added reseller in Clinton, Md., called HP's move into the consumer PC business "long overdue." His firm began operations in 1993 after a reorganization and serves as an HP authorized reseller. He and his corporate, educational and government customers have no complaints about HP's toll-free hardware support.

Kaplan supports HP's creation of a separate brand for the consumer market, since it makes it easier for resellers and their customers to differentiate between the consumer brand and the corporate one. He hopes HP takes care not to create consumer brands that undercut the brands sold to corporate customers. This would occur if HP sold consumer models that feature lower prices and more features than the corporate PCs. When told that the Pavilion line represents HP's first Win 95-loaded system, Kaplan said, "That almost speaks to the point" that HP may shortchange its corporate customers by its insatiable quest to win more consumer customers.

Some HP resellers concede that the company has difficulties adjusting to the consumer market it's trying to serve, but they remain confident that the company will work out any problems. After all, HP has logged perhaps the most consistently profitable results, quarter after quarter, of any computer manufacturer. VGE Computer Products, a $15 million value-added reseller based in Rochester, N.Y., has dealt with the manufacturer for 13 years and now sells and services HP products exclusively. Karen Robb, VGE's marketing manager, said HP has "aggressively taken steps to compete" in the corporate market.

If at first you don't succeed...

HP first manufactured personal computers in 1986 when it came out with the 286 Vectra computer, but not until five years later did the firm make a serious push into the PC market. In 1991, after significant redesign, HP tried to penetrate the commercial PC market with the Vectra line. The Palo Alto, Calif., firm tried to leverage its strong base of laser printer resellers to bring the PCs to market. HP tried to compel resellers who wanted to be authorized to carry its laser printers and its PCs, but many resellers turned to Brother, Okidata and other printer vendors that did not have that requirement. Since HP's lineup of PCs had weak customer demand, few resellers wanted to carry HP when ALR, Apple, AST and IBM already had strong sales.

That changed in late 1994. Realizing the consumer market represented the fastest-growing segment in the computer industry, HP launched a three-month pilot program for consumer PCs with Circuit City Stores Inc., a Richmond, Va.-based chain of electronic superstores. HP solicited feedback from consumers, and it improved its operating system shell, which serves as an interface with the customer, and made other changes.

Apple and IBM opened another window of opportunity for $25 billion HP by underestimating customer demand. So HP turned up its production lines while Apple and IBM had backlogs of unfilled orders.

Rodney Schrock, Compaq's vice president for desktop marketing, predicts that HP will hold a 3- to 5 percent market share in the U.S. consumer market in 1995. "HP is probably the only major new entrant this year, and long term they look like a very strong, viable competitor.