*NEWS*THE CUTTROAT PRINTER *INK* INDUSTRY

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*NEWS*THE CUTTROAT PRINTER *INK* INDUSTRY

 user 2005-12-24 at 10:30:00 am Views: 67
  • #13732

    Not Everyone Can Win in the Cutthroat Printer Industry
    December  2005
    Once
    a cash cow for hardware vendors, the page printer business has become
    cutthroat, and many traditional industry leaders are struggling to show
    a profit. Virtually every vendor utilizes a different strategy in their
    attempts to succeed, but operating margins are dwindling across the
    board. Why do manufacturers continue to spend billions of dollars
    developing technology, only to shove it into a piece of hardware that
    has been commoditized? Simply put, there’s a goldmine in the
    consumables. But players in the enterprise and small- and
    medium-business (SMB) workgroup segments will fare much better than
    those that cater to environments with low print volumes.
    Page
    printer hardware margins have long been slim. The past 18 months have
    been especially harsh, with price decrease percentages in the double
    digits and subsequent profit declines in almost every category. Vendors
    are scrambling to find the strategy that will work best for them. Some
    target the lucrative enterprise business with extensive partner
    networks, intricate distribution channels, and hearty direct sales
    forces. Others leverage their image as a well known consumer brand in
    attempts to capture a piece of the vast retail printer business. While
    strategies differ, one thing is for sure: printer vendors will have to
    grow their installed bases significantly over the next four quarters if
    they want to survive on revenue from consumables.
    Latest financials show latest struggles
    Some
    recent printer vendor financials confirm this dangerous outlook. The
    numbers signal strained increases in revenue and depleting operating
    margins.
    The situation is not specific to a single company; the
    declining operating margins are widespread. One-time charges and
    restructuring fees have negatively skewed outcomes, but even
    cosmetically enhanced non-GAAP numbers reflect unhealthy operating
    margins. HP (consolidated) operates at the lowest margin, and the high
    operating margin of the company’s Imaging and Printing Group (IPG)
    explains why investors have been trying to persuade management to split
    the unit off.
    While Dell’s entry into this business over two years
    ago certainly hasn’t helped matters, it is not the only reason for
    everyone’s issues either. A number of vendors, such as Samsung and
    Lexmark, have benefited greatly from their association with Dell. They
    have sold their printer engines to the direct giant under agreements
    that have been lucrative in terms of unit sales.
    Dell continues to
    expand its installed base, primarily focusing on color printers, with
    little regard for hardware profits. According to a Current Analysis
    Labs (www.currentanalysislabs.com) report for one of Dell’s key
    products, the estimated total manufacturing cost of the Dell 3100cn is
    $497.59 (assuming the piece is manufactured in China at a volume of
    250,000 units per year). Dell sold the printer for as little as $384,
    and although it has since returned the price to $499, Dell is still
    playing a no-profit game.
    Unfortunately, many vendors do not have
    the same luxury of foregoing profits to increase their installed bases.
    Dell sees printing, along with managed services, as its chance to reach
    its $80 billion revenue target by 2008. More specifically, Dell expects
    color page printer revenues to lead the way. Dell focuses on color for
    good reason; pages printed in color are expected to explode over the
    next years, and every color page printed is more lucrative for vendors
    due to the higher cost of color toner than a monochrome page.
    Even
    though the industry talks about Dell’s aggressiveness and how it
    continues to play the game without regard for current profit growth, it
    is not the only company that sacrifices short-term profits. The chart
    below compares the percentage change in profit, revenue, and operating
    margin from the last reported quarter and the same quarter a year ago
    for a number of vendors. HP’s consolidated results showed a 1%
    operating margin (HP IPG 13.2%), while Lexmark claimed a 6.8% margin,
    Xerox a 7.1% margin, and Dell a 5.4% margin. Profitability dropped
    across the board, as vendors sacrificed profits for sales, but Xerox’s
    61% decline in profit balanced by only a 1% growth in revenue
    illustrates the danger of such a strategy. How much longer can vendors
    wait for future consumables sales to pick up before they must change
    their strategies?
    Different strokes for different folks
    With
    profit being so elusive, it’s no wonder that different vendors target
    different segments. HP is the only vendor that can claim that it is all
    things to all people in terms of printing. Brother currently targets
    the low-end mono segment, primarily through retail, while Dell and
    Samsung target small offices/home offices (SOHOs) and SMBs via
    e-commerce and retail distribution. Dell is attempting to move into the
    enterprise segment; we expect it offer a color A3 device in 2006 to
    assist in this effort. Samsung is also expected to aggressively target
    the enterprise in 2006. Lexmark has traditionally targeted the low-end
    single function inkjet and enterprise printing segments. However, with
    the single function inkjet market in decline and Lexmark’s high prices
    in the laser segment, the company has seen a steep decline in profits,
    revenue, and operating margins. Ricoh continues to be primarily a
    player in the enterprise segment, piggybacking on its large copier
    channel.
    Retail has not turned into the page printer playground that
    many vendors had hoped. While pricing has declined by as much as 50% in
    some segments, unit sales have not increased across the board. All this
    is compounded by the tremendous expense that vendors face to get their
    products into the retail channel, let alone be successful once they get
    there. The steady decline in retail page printer pricing since the
    spring of 2004 has not been offset by steady increases in unit sales.
    In fact, unit sales in July and August of 2005 were down year-over-year
    even though average selling prices decreased nearly 10% across all
    business printing categories.
    However, this doesn’t mean that
    vendors are giving up. The number of individual promotions over the
    2005 Thanksgiving weekend increased 42% for color and 30% for
    monochrome page printers year-over-year, while the average price after
    promotion dropped 50% for color and 46% for monochrome devices.
    So why aren’t more SOHO and SMB consumers purchasing single function page printers?
    As
    pricing began to decline significantly at the start of the summer of
    2004, early adopters began to jump on board. Over the next three
    quarters, many of the consumers that had an interest, or a need, for a
    single function page printer made their purchase. When pricing dropped
    by double digits, those who were going to purchase did so. Pricing
    dropped another 20% in the summer of 2005, but color page printers were
    still a few hundred dollars and consumers weren’t biting.
    Low-end
    monochrome page printers were a different story because many dropped
    below the $100 mark. Monochrome single function printers have found a
    place in U.S. homes as accessories to photo-specific single function
    units. Unfortunately, page printer vendors have not been able to
    persuade SOHO and SMB users to increase their print volumes, which is
    essential for justifying the cost of entering highly price competitive
    retail in the first place. The price transparency in retail forced
    manufacturers to lower hardware prices in order to move units , but the
    low print volumes many times result in consumables revenues too low to
    make up for the profit lost on the hardware.
    Vendors that target the
    enterprise space face their own challenges. Color adoption has been
    slow, and IT managers resist the challenge of “color print management.”
    Some traditional printer vendors lack the product portfolio to compete
    against vendors with total solutions for printing and copying needs.
    Brother and Dell are the most notable are prime examples of companies
    limited by their product portfolios.
    Brother needs to add color
    engines fast. The company found success in low-end monochrome and
    all-in-one machines, market segments that other vendors neglected. The
    two sold very well for the company, growing Brother’s sales and
    operating income approximately 8% in the first half of 2005. However,
    color will take over the market sooner than later, and without
    compelling color offerings, Brother will not be able to meet the needs
    of the most profitable customer segment, the enterprise. Brother must
    start 2006 with new color engines, or it will be marginalized as a
    niche player.|
    Dell was blamed for commoditizing the printer market
    by introducing low- and no-margin products to an industry that
    historically fed from higher margins. The Texas company has most
    segments covered, but it will need to add an A3 machine to be able to
    address enterprise client needs. Without A3 and multifunction offerings
    to complement basic single function page printers, vendors will
    struggle to sell in the enterprise environment.
    Brand identity is
    also essential in the enterprise segment. Vendors such as HP and Xerox
    utilize their strong brands to drive color into areas that have high
    page volumes. HP certainly benefited from an early start in the
    monochrome segment, but its quality and service capabilities are the
    reasons why so many customers stayed with HP over the years. Xerox
    leveraged its stellar image from the copier market to transition into
    the single and multifunction printing market and up-sell existing
    satisfied enterprise customers with single function page printer
    machines that account for much of the enterprises page volumes.
    And the winner is?
    All
    printer vendors face challenges in both the retail and enterprise
    environments. The solution for most vendors lies in their abilities to
    capitalize on their strengths. Regardless of the sector of focus, one
    thing remains true: consumables sales are essential to survival. For
    that reason, until page printer vendors are able to successfully change
    SOHO printing habits via increased functionality, only vendors that
    penetrate the high-volume SMB and enterprise segments will find
    sustained success. While Brother continues to prove that concentrating
    on a specific segment can be fruitful, a diverse product portfolio and
    the ability to penetrate spaces that have high print volumes are the
    essential ingredients to any vendor’s long term success plan. Dell will
    need to show some profit sooner than later or investors will lose their
    patience, although stellar supply chain management, combined with
    tight-fisted supplier relations, gives Dell a cost advantage. However,
    other manufacturers are closing in when it comes to price, and it is
    essential for Dell to leverage another advantage, its vast customer
    data, to keep consumables revenue coming. However, Dell has a very
    limited portfolio, and its service offerings and partner relations in
    the printer segment are still rudimentary compared to those of the
    established players. For that reason, HP and Xerox, which are expanding
    with profitable color products in all the right places, will continue
    to increase lucrative color installed bases, and find sustained
    success.