HP’s ILLICITHP’s ILLICITPROFIT MOTIVEPROFIT MOTIVE

HP’s Documents suggest the “smart HP’s Documents suggest the “smart chip” and SureSupply implementation chip” and SureSupply implementation

were based on the desire to increase ink were based on the desire to increase ink sales.sales.

HP00058758

“Vendors sell consumer printers at cost, or even sometimes at a 20 percent loss, say financial analysts at Bear Stearns who track Epson and HP. But on the flip side, both firms earn a 60 percent gross margin on ink jet and toner cartridges, says Bill Hand, financial analyst with Bear Stearns.”

– Why Do Ink Cartridges Cost So Much? Tom Spring, 9/28/03

4.6 + 5.8 = 10.4 Cartridges Over Life of Printer

Speed of OrderingSpeed of Ordering

Nearly two-thirds of surveyed consumers Nearly two-thirds of surveyed consumers place an order immediately or shortly place an order immediately or shortly after they are alerted that a supply is low:after they are alerted that a supply is low:

32% 32% 31% 30% 27%

38%

5% 4% 7% 5% 4% 7%

28%32%

17%

0%

20%

40%

60%

80%

100%

Order with a few days ofreceiving alert

Order immediately Wait longer than a weekto order

Wait until cartridge runsout

It depends / Not sure

Total (n=100) Direct Connect (n=71) a Networked (n=29) b

HP00000738?

Amount OrderedAmount Ordered

Half of surveyed consumers buy what Half of surveyed consumers buy what SureSupply suggests or more.SureSupply suggests or more.

31%27%

41%

22% 21%24%

2% 1% 3%

45%

51%

31%

0%

20%

40%

60%

80%

100%

Buy exactly what SureSupplysuggests

Buy more than suggested tostock up

Buy less than suggested It depends / Not sure

Total (n=100) Direct Connect (n=71) a Networked (n=29) b HP00000738?

DAMAGE MODELDAMAGE MODEL

Damage ModelDamage Model

Per HP’s Mediation BriefPer HP’s Mediation Brief 2 Million Subject Printers2 Million Subject Printers

3% of total inkjet 3% of total inkjet printersprinters

10.4 Cartridges over 10.4 Cartridges over printer lifeprinter life

20.8 Million Subject 20.8 Million Subject CartridgesCartridges

$16.8 Average Profit per $16.8 Average Profit per CartridgeCartridge

Total = $350 MillionTotal = $350 Million

Independently Verifiable Independently Verifiable AnalysisAnalysis

62 Million Subject Printers62 Million Subject Printers 100% of total inkjet 100% of total inkjet

printersprinters 10.4 Cartridges over printer 10.4 Cartridges over printer

lifelife 645 Million Subject 645 Million Subject

CartridgesCartridges $16.8 Average Profit per $16.8 Average Profit per

CartridgeCartridge Total = $10.8 BillionTotal = $10.8 Billion

Damage ModelDamage Model Household Ink Jet Printer Installations by Household Ink Jet Printer Installations by

BrandBrand

Source: Lyra Research, Inc.,2005 U.S. Ink Jet Supplies Survey

N = 977

Damage ModelDamage Model

HP’s Ink Jet Cartridges and RevenueHP’s Ink Jet Cartridges and Revenue

2002-2005 $20,134,000,000