PRINTING CASH, FOR NOW

The sign in the window at Staples appears altruistic: "Recycle your empty inkjet cartridges," it urges. "We'll donate $1 to local education." But this program isn't aimed only at saving the world--it's also intended to swipe some milk from the cash cow known as printer consumables. Staples takes those donated cartridges and sends them to suppliers who clean them, refill them with ink and repackage them in green-and-black boxes as Staples-brand cartridges, which compete alongside brands like Canon and HP. Consider HP's trusty No. 56 black inkjet cartridge, which sells for $19.99. Staples' "remanufactured" version fetches $16.99--15 percent less. The cashier will throw in $7 worth of printer paper to get shoppers to try Staples ink.

Among HP's dysfunctional collection of businesses lies a real gem: its printing and imaging division. HP sold $24 billion worth of printing gear last year, which delivered the bulk of HP's $4.2 billion in operating profits. Much of this profit comes from supplies like ink, toner and photo paper. But some customers are tired of buying supplies that seem to cost more than the printers themselves--and new options are appearing. That raises the question: could that competition start to tarnish HP's crown jewel?

Not if the company can help it. Industry observers say HP has done a superb job of injecting patent-protected technology into things like printer cartridges, limiting rivals' ability to do pure knockoffs. Still, consumers are discovering new alternatives. More folks printing digital photos have realized that online services like Snapfish, Ofoto and Shutterfly can be cheaper than home printing: 8 percent of digital photos were printed online in 2004, and 21 percent more were printed on machines at retailers like Wal-Mart, according to Lyra Research. By 2008, Lyra says, just half of digital photos will be printed at home, limiting demand for ink and paper. Then there's Cartridge World, which refills inkjet and laser cartridges at 135 U.S. stores for half the cost of a new cartridge. It plans to open 300 stores this year.

The success of HP's printer business has catapulted its president, Vyomesh Joshi, into the competition to replace Carly Fiorina. One advantage: as an insider, he's unlikely to clash with HP's strong culture the way Fiorina did. But some outsiders are skeptical. "I would think his candidacy is almost an oxymoron," says recruiter Steve Mader of Christian & Timbers. "He's the one candidate who has no exposure to where the real problems are." As for the rivals trying to horn in on its profits, HP remains confident. "Will prices come down? Sure," interim CEO Robert Wayman told NEWSWEEK. "But it will remain a very profitable business." HP investors hope this picture develops just as he promises.