HP To Invest $150 Million In RFID

Forbes ^ | 08.25.05 | Tom Van Riper

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If radio frequency identification (RFID) technology grows at the breathtaking clip so many are projecting, Hewlett-Packard wants to make sure it doesn't miss being out in front. It's been behind the curve before, and doesn't want to be there again.

The Palo-Alto, Calif.-based company is dedicating the bulk of a September technology forum to demonstrating RFID chips it is developing with partner Hitachi (nyse: HIT - news - people ), giving attendees a first-hand showcase of the next-generation bar coding technology. Guests will experience everything from retrieving assignments from interactive kiosks to embedded chips in their event badges, the company said.

The company already puts RFID chips in printers and computers it delivers to Wal-Mart Stores (nyse: WMT - news - people ) and other retailers to help track inventory.

"We've taken the technology seriously, we started looking at it before the retailer mandates came around," said Frank Lanza, HP's director of RFID Solutions.

The market is indeed promising, but some experts believe that mandates have artificially inflated the drive to adopt RFID. In July, two research firms said that mandates from retailers like Wal-Mart to adopt RFID have caused a premature rush to market, resulting in overly bullish spending forecasts and failed expectations

HP's stock has been enjoying a recent upswing under a fresh round of cost cutting, including over 14,000 planned layoffs, from new CEO Mark Hurd. The company's shares last traded near a 52-week high of $26.98, up 30% since February, when Carly Fiorina departed.

"Mark Hurd's focus on basic operational blocking and tackling and pragmatic 'roll up your sleeves' style deserve some of the credit and will continue to positively impact results," tech analyst Cindy Shaw of Moors & Cabot wrote in a research report.

Of course, sprucing up the balance sheet in the short term only takes you so far. For a company whose image has grown staid in recent years--its mainstay is still printers and computers and the company largely missed out on the first big Internet wave--HP is trying to get back on the cutting edge track.

Lanza said the company will spend $150 million over the next five years enhancing its capabilities in RFID. That's a tiny chunk of HP's $80 billion in annual revenue and about 1% of its annual R&D budget. Still, Lanza believes that's enough to make the company competitive against the likes of Sun Microsystems (nasdaq: SUNW - news - people ) and Symbol Technologies (nyse: SBL - news - people ) for leadership in the space.

Future revenue potential will come from selling services that help business customers set up RFID systems, according to Lanza. Analysts expect the company will make most of its money by developing and licensing its technology companies building RFID equipment.

The market for RFID tags is expecting to grow nearly tenfold to $2.8 billion by 2009, according to market researcher In-Stat, based on the assumption they'll gradually make their way from inventory palettes to store shelves. Throw in services and systems needed to support the tags, and the potential market swells to over $7 billion.

Piper Jaffray analyst Gene Munster believes the RFID market indeed has the potential to reach those levels, though it's far from certain, given the nation's ongoing debate over speed and efficiency versus privacy concerns. Indeed, how many people will want someone else having access to an electronic record of everything they buy, even if it means getting in and out of a store more quickly?

Also, it remains to be seen how much prices will come down as the product matures--a common thread in almost all tech products.

"It's one of those things where there is a potentially great market, but it always seems to be two years away," Munster said.

Still, some predict that by 2009, the ability to swipe everything from a pair of pants to a bar of soap under a scanner will mean that shoppers will spend less time in a cash register line. And many see the functionality going way beyond retail.

Lanza pointed to opportunities in asset tracking. Companies can use RFID chips to keep tabs on auto and aircraft parts and hospital equipment among other things.

"I can even see it at a law firm," Lanza said hopefully. "If a case folder gets lost and you need to be in court in a half hour, what better way to track it down?"