The trials of HP (pg. 2)

By Nicholas Varchaver, Fortune senior writer

Kamb built his career on his likability and ease. "He's the kind of person who can talk about anything under the sun," says a former HP colleague, David Colf. Raised in Malibu, Kamb is the son of a Japanese-American mother and a much older American father (now deceased) who was once a Hollywood screenwriter and penned pulp and noir movies in the '30s, '40s, and '50s, such as "The Captive City" and "Pardon My Past." He also wrote installments of a B-movie series titled "Crime Does Not Pay."

A yawning generation gap divided Kamb and his father, who was in his 80s when Kamb was a teenager. The two clashed, and the self-described "headstrong" youth left home while still in high school. He briefly attended music school and still plays piano and guitar and sings. (During happier times he maintained a collection of some 100 vintage Fender guitars. Kamb is also a classic gearhead who can spit out mind-numbing detail on, say, the water-cooled engine of his crimson Harley-Davidson V-Rod.) Kamb, who never graduated from college, even showed entrepreneurial inclinations, opening an alcohol-free nightclub for kids.

By his early 20s, Kamb settled into the consumer electronics industry, eventually joining Compaq in a sales job in the mid-'90s. In 2000 he accepted a position in Japan, and he stayed in Tokyo after Compaq was acquired by HP in May 2002.

Kamb's assignment for HP was loosely defined. He was its liaison with companies, such as Samsung, that were both giant customers and vendors for HP. He also had a second function: Kamb monitored the Asian market and kept his employer abreast of which new gizmos were getting hot in tech-obsessed Tokyo before they even existed in the U.S. A big part of his job was cultivating contacts, and he had the perfect personality: He could keep a crowd in stitches as they ran up a giant dinner tab on the company account.

It was in the course of Kamb's networking that he met Katsumi Iizuka, now 56. Iizuka was a dynamic figure. "He's like the Uncola," says Kamb. "He's the 7 Up of Japan. Where everyone is stoic and reserved, he completely goes in the opposite direction." Iizuka was a prominent entrepreneur in a country of salarymen. He'd once been an exchange student in the U.S. and had imbibed the American zest for entrepreneurship.

Iizuka launched Dell's Japanese operation in 1993, then two years later started his own company, Akia, which made laptops with LCD screens. After Akia flamed out, Iizuka began a second startup, Dinner Inc., which sold LCD screens for computers and televisions. By the time Kamb got to know Iizuka, the entrepreneur had decided to take his LCD experience a step further with a fully outsourced enterprise that would sell low-cost flat-panel TVs. The company would be called byd:sign ("by design").

Kamb and Iizuka hit it off. According to Kamb, he was overwhelmed when he first arrived in Japan, an alien country, at his first nonsales job. "I felt stupid there," he says. "I felt out of my element. Katsumi helped me a lot." Iizuka guided the younger man, and Kamb seemed to view him as a father figure. Their relationship would become the fulcrum of the events that sent Kamb's career soaring - and then crashing.

Thank you for the hard work

Today it's easy to forget - with HP surpassing IBM (Charts, Fortune 500) as the largest tech company and a struggling Dell forced to recall founder Michael Dell to the helm - that the balance of power felt much different a few years ago. In 2002, faced with the seemingly unstoppable ascendancy of Dell, HP merged with Compaq and girded for battle: It declared it would no longer sell its printers to Dell. Not long after, in September 2002, Dell announced it was entering the printer business.

This, needless to say, was not welcome news at HP. It had not only lost a sales outlet but now also faced a fearsome new competitor that was looking to elbow the company out of its biggest source of profits. However, HP had a team that could gauge the extent of the threat: its competitive-intelligence unit. In fact, HP had multiple CI units - one was a centralized group of about 15 people who reported through a vice president to Shane Robison, HP's chief strategy and technology officer; other, separate CI groups were in its divisions, including the imaging and printing group.

Although controversial, competitive intelligence has become increasingly institutionalized. Its practitioners have a trade organization and a code of ethics. A leading CI consultant, Leonard Fuld, estimates that Fortune 1,000 companies collectively spend more than $500 million internally on CI each year. He predicts that number will increase to $10 billion over the next decade. Experts like Fuld say CI overwhelmingly consists of analyzing public information, not black-bag jobs in the middle of the night. But the paradox of CI is that people tend to hear about it only when operatives decide to play secret agent.

At HP the CI team, stocked with former Compaq staffers, was already pretty much in a state of permanent alert vis-à-vis Dell. They combed through industry reports and grilled any source they could find in the sales channels. But to tackle the grave new threat, HP mustered all its resources. The CI staffers in the printing unit launched their own investigation. One of the people they enlisted was Karl Kamb, and he turned to contacts such as Iizuka. Iizuka "still has a lot of relationships inside Dell," says Terrie Lloyd, a tech entrepreneur and blogger in Tokyo who acknowledges helping Kamb on the Dell project but declines to specify his role because he signed a nondisclosure agreement. "So he's able to sort of reach in and get information from time to time."

The fact that Kamb brought Iizuka into the intelligence project is confirmed, albeit obliquely, in HP's legal papers: "In or about October 2002, Kamb arranged for HP to hire Iizuka as a consultant to provide market research regarding HP's competitors' operations in Japan." Kamb sent Iizuka a request for a proposal with an eight-week timeline and dozens of questions.

E-mails submitted by Kamb in the suit, which Fortune obtained from the public federal court database in the days before they were sealed by the judge, show Kamb updating Barbara Berge, whom he described as his supervisor on the Dell CI project. Another e-mail Kamb sent to Iizuka stated that Berge was planning to visit Asia to monitor the progress of the project and noted, "[Berge] wanted to thank you for the hard work to date and encourage you to keep chiseling away on what is inevitably becoming a wide range of activities around this subject."

Iizuka kept chiseling away. He planned a visit to a Chinese factory where Dell's printers would be manufactured (by Lexmark (Charts, Fortune 500)), and he questioned the plant manager. He traded e-mails with Dell's director of procurement, who apprised him of discussion topics and attendees for an upcoming Dell meeting in Osaka. But what Iizuka was gathering was only one piece of a bigger puzzle.

Right on the money

On Feb. 20, 2003, HP's competitive-intelligence chief sent an e-mail to a colleague that summarized what HP knew of its rival's printer plans: "Dell will introduce three printer models in the late March/Early April time frame, a $149 all-in-one inkjet, a $289, 19PPM [pages per minute] B&W Laser and a $499 22PPM B&W laser.... Dell also plans to introduce a 40PPM model at $799 around the middle of this year."

The e-mail contained precise detail - with nary a caveat to be found - on many aspects of Dell's plan, including its intention to offer free shipping for printer cartridges, its development of "print status monitor software which will prompt customers to purchase replacement cartridges," and numerous technical specifications.

Five weeks later, in late March, Dell announced the details of its new printer line. There would be a $139 all-in-one inkjet; a $289, 19-page-per-minute black-and-white laser; a $499, 22-page-per-minute black-and-white laser; and an $839, 22-page-per-minute networked laser. HP's analysis was shockingly prescient. But for a few minor errors, the CI team had nailed everything: prices, specs, software details. It was all there, usually to the exact dollar or pages per minute. Could HP have obtained such exact data from legitimate public sources? A review of numerous analyst reports from the time reveals nothing of comparable specificity. Adds Dell spokesman Pearson: "We keep our product specifications and prices confidential until launch."

Indeed, a former HP executive in a position to know admits that the company obtained confidential Dell material. According to this source, an industry analyst inadvertently gave the material to one of HP's CI staffers. "I don't recall whether it said 'confidential' or not, but clearly it did have pricing data, it had the models, etc.," the former executive says. "Clearly a logical person would say, 'This is confidential and I shouldn't have it.'" He describes the use of the document as "an honest mistake" - one that wasn't repeated - and just one part of a giant information-gathering process.

The key details of Dell's printer plans, this source says, did not come from Kamb or Iizuka. But the account supports Kamb's most serious charge: HP gathered confidential information on Dell. And that means HP may well have violated its own policies - which prohibit examining "information about competitive proposals or products that was submitted to customers, channel partners, suppliers, other business partners or anyone else with the understanding they would treat it as confidential." And if HP knew it was obtaining proprietary information, that would put it at risk of violating the Economic Espionage Act, which prohibits gaining access to another company's trade secrets.

According to two former HP executives, this research - though not its provenance - was shared with HP's top officials, including Robison, the company's chief strategy and technology officer. And the overall findings were brought even higher, says one of the former executives: "When Carly Fiorina said she knew what Dell's printer strategy was, she knew what Dell's printer strategy was." (Fiorina declined to comment.)

A very covert op?

Kamb and Iizuka weren't just collaborating on the Dell investigation in late 2002 and early 2003. They'd begun chatting about Iizuka's new project, byd:sign. Prices for flat-panel technology had plummeted, and Iizuka saw an opportunity to sell discount LCD and plasma TVs while keeping costs to a minimum by outsourcing to China.

Kamb began spending time on byd:sign while still at his HP job. He says he wanted to assist a mentor who had helped him. Kamb met with investors to raise money for byd:sign; he filed for a trademark for it in the U.S. and even permitted the startup's website to list his address as "There was a period of time when I was more involved [in byd:sign] than I should've been," Kamb acknowledges today.

HP's standards of business conduct prohibit employees from working for a competitor while still at HP. If Kamb had left HP at this point to join the startup, it's hard to imagine that this would have become a big deal. Indeed, Kamb thought hard about leaving. As he wrote to a byd:sign colleague at the time, "Dude, I'm in a real pickle ... I have a VP/GM, level-three job today, with talks about maybe level two?? I'm in DEFCON 2 mode now!! It's a real tough choice, but clearly, this opportunity [byd:sign] has real legs to it ... it's a chance to do something 'our' way for a change."

Kamb says he informed HP's Robison that he wanted to depart to join the TV startup but was persuaded - in part by a raise--to stay. And by the fall of 2003 it appeared that byd:sign might not have legs after all. Key funding had fallen through, and the startup's prospects were grim.

That's when Kamb embarked on an odd bit of personal synergy: He decided to take byd:sign's flat-panel-TV idea and try to entice HP to enter the business. And that's how he ended up making his pitch to Fiorina. "He came to us with a proposal," recalls John Romano, who was then a senior vice president heading the consumer PC unit and got involved in HP's TV project. (HP notes that it was already considering the idea.) Kamb proposed farming out the manufacture of the TVs to a Chinese company called Xoceco - the same company slated to make byd:sign TVs.

Kamb seemed aware that his superiors at HP would frown on his actions if they knew the whole story. In an October 2003 e-mail to several colleagues (including Marc McEachern, another HP executive who worked with Kamb on byd:sign), Kamb wrote, "Under NO CIRCUMSTANCES is anyone to say ANYTHING going forward about Marc or my former affiliation with Iizuka-san, bydsign or whatever."