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 user 2003-10-22 at 9:44:00 am Views: 75
  • #7832

    HP May Face New Competition In Printer Supplies MarketTuesday October 21, 10:46 am ET

    PALO ALTO, Calif. -(Dow Jones)- Hewlett-Packard Co. (NYSE: HPQNews)’s printing supplies business has a Midas touch. More than 50% of the company’s profits come from this lowly business supplying ink cartridges, paper and toner to its inkjet and laser printers. Gross margins can run a comfortable 60%.

    Starting next year, competitors may finally grab some gold for themselves. A handful of H-P’s early ink-jet patents will expire beginning in 2004 and with them a legal stoplight that keeps vendors from bringing low-priced compatible cartridges to the U.S. and Western markets.

    “These guys will find a way to get into the revenue stream,” says Stewart Krentzman, chief executive of Oki Data Corp.’s Americas operations. “There is a lot of speculation as to where this will go.”

    Few expect an instant flood of cheap H-P compatibles. Technology has advanced a lot since these patents were filed and more recent advances may make their manufacturing secrets obsolete. But for a first time, the crack of an opportunity has appeared.

    “I think people will take a run at it,” says Pradeep Jotwani, senior vice president and head of H-P’s supplies division. But their success is in doubt, and the impact on the company will be “trivial,” he says.

    H-P has 7,000 printing patents, 3,000 of which cover inkjet supplies. The company also spends $1 billion each year on inkjet research and development.

    “Some of the old protection goes away,” Jotwani acknowledges of the patents. ” In our judgment, it is more than offset by new patents.”

    Indeed, H-P’s intellectual property has been what has always stymied outsiders. The company manufactures each ink cartridge with a patent-protected printer head. Several Taiwanese companies have duplicated older H-P cartridges and sold them in places where the patents aren’t enforced, such as China, Brazil and Africa.

    But competitors have been unable to establish themselves in the U.S. market. When they tried, H-P quickly chased them into court, as it did with Taiwanese manufacturer Microjet Technology Co. in 2001.

    Yet the expiring patents clearly protect some significant breakthroughs. One January 1987 patent describes the manufacturing technique for laying down tiny wiring on a printer head, where the bond has to be strong enough to survive repeated drenchings of corrosive hot ink.

    “Nobody had done anything like it,” says inventor and former H-P engineer Gary Hanson, who points out the technique still is used today.

    Older Cartridges Targeted

    Industry observers say the first cartridges to lose patent protection include the 51626A, 51629A and 51641A, older products for which there are still significant sales volumes. The high-volume 51645A and C6578d cartridges aren’t expected to be under assault as they are protected by newer patents.

    H-P officials disagree and argue that cartridges such as the 51626A can’t be safely duplicated with just the expiring patents. The 51626A was changed in the early 1990s to handle larger print loads and to incorporate modern materials.

    More so, H-P officials say the company has stood up to competition in the past from refillers, who collect empty cartridges, refurbish them, fill them with ink and sell them inexpensively. Refilled cartridges have taken only about 14% of the total inkjet market.

    However, the appearance of compatibles could lead to a behavioral change among H-P customers, who have obediently returned to their stores, year after year, to buy H-P branded ink cartridges. If consumers begin to see compatible cartridges selling at discount, they may start to expect lower prices, even on newer models.

    The incipient competition comes at an inopportune time for the Silicon Valley giant, which last year combined with Compaq Computer Corp. H-P relies on profits from its printing division to balance out losses in its personal computer and server businesses. In the recent third quarter, the company’s imagining and printing group brought in $739 million, or 79%, of $931 million in reported earnings from operations.

    This success makes the company an attractive target. In June, H-P sold its 200 millionth inkjet and claimed a 44% market share of the inkjet printer market, well in front of Seiko Epson Corp. with 19.8% and Canon Inc. (NYSE: CAJNews) with 17.1%, according to second-quarter analysis from Gartner Group. Its laser jet market share is 51%.

    In the three following months, H-P’s supplies sales were up 16% while the printing division as a whole grew 10%. Sales of paper, toner and ink cartridges in the entire $82 billion supplies market will only be up 4.7% this year, says Jim Forrest, an analyst at Lyra Research and managing editor of its Hard Copy Supplies Journal.

    The opportunity is interesting businessmen such as Alfred Wirch, managing director of 3T Supplies AG in Europe. He says his firm formed a company in the U.S., the Swiss American Ink Jet Company, to handle distribution of compatible cartridges.

    Lawyers are looking into the timing of the first shipments, Wirch said in an e-mail. Another company looking at the opportunity is Future Graphics LLC. Luke Goldberg, vice president of sales, says the company will conduct a patent search to determine what cartridges can safely be sold in the U.S.

    Once completed, if the compatible cartridges available are of good quality, ” then sure” the company will compete, Goldberg says. “We’ll be watching closely to see how the market evolves.”

    But some industry insiders offer a warning to newcomers. H-P’s broad patent portfolio makes entering the business a risk.

    “The fact that (H-P’s) original patents are going to expire, I’m not sure that is going to be a big issue,” says J. Bruce McCubbrey, a patent attorney at Manatt, Phelps & Phillips LLP in Palo Alto. “You don’t know how a jury will respond when they see a (newer) patent waved at them.”

    McCubbery helped defend Nu-Kote Holding Inc. when H-P sued it in 1994 alleging patent infringement. The company claimed Nu-Kote’s replacement cartridges violated 14 of its patents. Most of the patent violations were thrown out. But a jury found infringement against three and Nu-Kote lost.

    A large patent portfolio is intimidating, concedes Edward O’Connor, an attorney with Stradline Yocca Carlson & Rauth. With the cost of a patent litigation running from $1.1 million to $3 million, “a lot of people don’t want to take a chance on it,” he says. Even if they think they will win, “It terrifies them.”

    The compatible market could nevertheless present H-P with a challenge. Earlier this year, Dell Computer Corp. (NasdaqNM: DELLNews) went after H-P’s hardware business by selling branded printers from Lexmark International Inc. (NYSE: LXKNews) . “We are in this for the long haul,” says Dell Senior Manager Phil Ventimiglia.

    Come next year, some ambitious cartridge vendors might make this claim as well.