Hewlett-Packard is setting its sights on rival Dell Computer after bringing its PC business back to profitability for the first time in several years.
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HP has revamped its distribution system so that it straddles the line between a reseller model and a direct sales model, and its newer products such as Media Center PCs - which allow users to control their home entertainment functions from their PC - 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 and IDC. Both companies sold about four million more units than IBM.
Zitzner claimed sales of HP's Media Center PCs have exceeded expectations, although he declined to provide specific figures. Consumer sales of those PCs with Microsoft's Windows XP Media Center Edition operating system have remained strong into the new year even after the holiday season.
HP is also courting enterprise customers with its Tablet PC and iPaq handhelds. Zitzner said the company was pleased with sales of the Compaq TC1000 Tablet PC, adding that the recently introduced iPaq 5450 with 802.11b wireless Internet access capability has attracted attention with its built-in fingerprint reader.
If HP is to remain competitive for the rest of the year, it needed 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."
Dell's direct sales practice allowed the company to operate a very lean distribution model, but stifled 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 added.
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.
"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 Dataquest research .
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, he added that the company will ramp up its direct website sales program, which is a key part of its distribution strategy.
HP's PartnerOne program, which was introduced last November, consolidates the Compaq and HP approaches to resellers into a new program that provides incentives for resellers to stimulate demand.
IDC's Kay said both direct and reseller models are needed to satisfy different types of enterprise customers. Dell sells many of its products through distributor Ingram Micro, and HP has added Compaq's relative success in a direct distribution model to its historical strength in the channel, he added.