Lexmark Moves to Win Over VARs

That said, Lexmark has its challenges, along with everyone else. Its back-to-school business, for example, was weak relative to expectations and in comparison to past years. Sales to business users, likewise, are hardly going at a torrid pace. But the promise is there, and already sales of all-in-one ink-jet devices are taking off, as are sales of color laser devices and color laser multifunction printer units. Further, the company has built a healthy, recurring revenue around supplies, which, as of the third quarter of 2002, account for 55 percent of total revenue.

In an interview with VARBusiness senior executive editor T.C. Doyle, Curlander outlines the opportunities and challenges before him, including his company's controversial deal to supply printer technology to Dell.

VB: When you look at the spectrum of IT companies out there, who do you think is running a tight ship?

Curlander: Obviously, the guys who continue to impress me are Dell. Dell just announced a terrific quarter, with 22 percent revenue growth and 28 percent unit growth%85The other guys who seem to be doing OK are Microsoft, though they are somewhat cautious going forward.

VB: Let's focus on the former, because a lot of people want to know more about that. Your deal with Dell,walk me through the thinking on that.

Curlander: Well, there's not a lot we can say about that. I think, relative to Dell, we view it as a deal that is complementary to Lexmark's strategy. And it's something that makes financial sense. Obviously, what we've said and what Dell has said is that Lexmark is the initial partner, not the only partner. We've also said that there are no volumes that have been committed. From my perspective and from Lexmark's perspective, this is a very small part of what we do. Our OEM business is less than 10 percent of Lexmark's revenue. And, fundamentally, our strategy is to drive the Lexmark brand. That's what we do, and that's what we are counting on for growth.

VB: There is a belief out there in the marketplace that you have an unprecedented opportunity to step up and benefit from the HP-Compaq merger. Do you sense that, or am I jumping to conclusions?

Curlander: I think in the channel, in general, and in certain segments, specifically, HP is very focused on Dell. And I think the Dell model is driving HP to be a much more direct, going-forward company%85

That has a lot of people in the channel very nervous. So that can do nothing but help Lexmark, because we're very focused on the channel. We're very committed to driving the Lexmark brand working through the channel. We're not about driving a large-scale direct model like HP. That appears to be [its strategy] to compete against Dell. Fundamentally, what that does is makes the channel, VARs and solution providers more receptive to talking to Lexmark about how we can grow our businesses together.

VB: Has the opportunity manifested itself into some numbers or milestones that you can point to yet?

Curlander: I think [it's] too early to point to specific numbers. But, from our perspective, we see a lot of opportunity. The direction that our business has gone over the past two or three years has opened up a whole new set of possibilities for us to work with the solution-provider channel.

VB: Can you drill down on that?

Curlander: Let me talk about where we see printing going and what Lexmark is engaged in. For the past eight or nine years, we have had the model where we engage directly with our largest corporate customers. Starting about seven or eight years ago, we started focusing on individual industries. We started with the financial-services industry, the public-sector and telecommunications industries, and in health care, just to name a couple. Lexmark would engage directly in terms of demand generation to tell the Lexmark story,our story about technology and our vertical integration. We talked about our own laser technology vs. HP's buying technology from Canon. And we were going out telling that story and then pulling sales through the channel%85But what we have discovered over the past several years is that the printing market is changing. And we see some real opportunities as a result of it.

VB: How so?

Curlander: When we look at the future of printing, what we see is distributed pages. If you look at the paper consumption in the world, it's about 60 trillion pages a year. But the amount that's printed, copied or faxed in a distributed way%85is only about 5 percent of the pages in the world. The 95 percent are things like newspapers, reports, etc. They are things that are printed centrally, and that information is transported in paper form to the user. Fundamentally, that's changing%85As [content] comes online and gets accessed by users, it will start to move electronically to people. That's already happening. People read a lot on their displays and then discard it. But more and more, they will print for their own productivity and convenience%85The net is this: The content is coming in a way that's going to drive distributed pages. As we look forward, it's easily conceivable in the 10-year horizon that we could go from 5 percent total pages being distributed pages printed on distributed devices to 10 to 15 percent.

VB: How do you make the most of that where an HP or Canon or Xerox doesn't? Aren't their chances to capture that just as good?

Curlander: Well, in terms of how those pages are coming, you're either going to read or print [them]. So, the guys in the network-connected printer business,primarily HP and Lexmark,are going to be much greater beneficiaries than somebody in the copier business who continues to see declining pages being copied. Secondly, that is connected with what is also going on inside corporations in terms of their internal e-business initiatives. What's happening there is that people fundamentally have invested significantly in e-business infrastructure. Then they stopped because they were grossly overcapacitated. What they are trying to do now is leverage their infrastructures. The other thing we see is that people are very focused on how to improve their processes. In large corporations, there are hundreds,even thousands,of paper-intensive processes. You have to reengineer those processes in order to utilize the infrastructure,otherwise, nothing happens. The bottleneck for most companies is that there's neither resources nor capabilities to reengineer those paper-intensive processes. So, as we go through industry by large account, it's incredible what we find: so many paper-driven processes [just waiting to be reengineered].