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HP’s paper jam: Another white flag for the old computer age

Hewlett-Packard Co. CEO Meg Whitman is working to shift operations toward the big tech trends, such as tablets and a move to online computing services, while making HP printers and ink more affordable. (Ariel Jerozolimski/Bloomberg)

Hewlett-Packard, one of the American tech world’s last big ancients, waved another white flag for the age of personal computer and printer domination on Monday, announcing it would split its business tech division from the old-school hardware that had defined it for years in home offices across the country.

The two public companies will divide along past and future lines: HP Inc. will deal with the the company’s traditional lifeblood, such as desktop computers and inkjet printers, as well as 3-D printing and what it called “new computing experiences.” Hewlett-Packard Enterprise will try to capture the growing and future markets of servers, networking and cloud computing.

Chief executive Meg Whitman, who will lead the enterprise division, said the change would help HP continue to “aggressively go after the opportunities created by a rapidly changing market.” Analysts said that could mean a refocus on business technology that is far removed from the printers and PCs that long fueled its livelihood.

Founded in 1939, HP was one of the biggest driving forces in the suburban computer revolution, hiring hundreds of thousands of employees largely on the back of its home hardware -- including printers and their high-profit ink cartridges, too.

The company is still a powerhouse in America’s fading printer industry, selling 2.6 million single-function printers in the United States last year, more than its 10 closest competitors combined. Two out of every three printers sold across the country last year were branded with HP's stamp.

But the needs that long defined the home printer – sharing vacation photos, saving show tickets, printing out driving directions – have been replaced handily by cellphone cameras, apps and GPS. The number of pages printed in North American homes fell 15 percent from 2009 to 2011, according to printing and imaging consulting firm Photizo Group, and have continued to drop off since.

Worldwide inkjet and laser printer sales in the second quarter dropped nearly 8 percent compared to last year, International Data Corporation statistics show. The world's inkjet-printer shipments have dropped from 85 million in 2010 to a predicted 68 million this year, Photizo data show.

“The way HP earns a lot of its money is through physical print output,” said Rob Sethre, a vice president of client engagement at Photizo Group. "And altogether, print output is declining gradually, and there is a lot of competition in the industry to grab growing pieces of a slowly shrinking pie.”

HP’s printer business has long been built less on hardware sales than its river of black gold: Ink. The messy dye in proprietary printer cartridges has been called one of the most expensive liquids on earth, according to Consumer Reports; at $13 to $75 an ounce, it can cost more by volume than fine champagne or perfume.

That cash cow afforded HP high profit margins that helped buoy the low-margin activities, like building the printers that drank the ink. The company has invested heavily in researching and developing ink, and holds thousands of patents for printers, toner and cartridges. But HP’s ink and other printer supplies, which makes up a large part of its printer revenue, has sagged over the last several years.

HP's other former profit powerhouse, PCs, have also lost their repute as moneymakers against the tides of tablets, laptops and phones. PC shipments rose more this year than in previous years, but that was largely because companies upgraded away from Microsoft’s newly unsupported Windows XP.

HP, along with Dell and Lenovo, remains one of the country’s top PC makers, and it is the world’s third-largest hardware company by sales, after Apple and Samsung. But even its stature in the world of desktops has sagged. HP’s worldwide market share for PCs has fallen from 20 percent in 2009 to 15 percent last year. Eleven of HP’s last 12 quarters have seen falling revenue.

Wells Fargo analysts said the company's division would help separate the slower cash flow of HP's printer-and-PC business from its potentially growing business enterprise work. But HP remains chained to the sales of paper and ink: Outside of outfitting home offices, HP has focused on helping companies upgrade and optimize their "printer fleets."

While growth industries like business servers, storage and networking make up 25 percent of HP's revenue, printers still make up 21 percent. And its future success is far from guaranteed: Its server brand, for instance, will have to compete with big, cheap server clusters from Google and Facebook, as well as corporate “clouds” run by Cisco, Dell and Lenovo.

"This is the best tactic to continue to this turnaround journey," Whitman said, "and have a real chance to make a real difference on a go-forward business."