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 user 2007-03-21 at 10:14:00 am Views: 45
  • #17477

    Analyzing the newest Lexmark bundle
    you glanced at Best Buy’s weekly circular last week, you saw a Lexmark
    International promotion on its front page — a free all-in-one printer
    if you purchase one of two PCs.This new bundle may sound odd if you
    recall that Lexmark exited a number of bundling deals last year that
    didn’t meet profit expectations, but it represents an important point
    in understanding the Lexington-based company’s business strategy.While
    those bundles — often low-end single-function inkjets — were
    unsatisfactory, the new all-in-one bundles, analysts say, have the
    potential to aid the company’s still recovering inkjet business. The
    reason is all in the ink.

    Bundles: A bad sale?
    early 2006, Lexmark executives announced that the company would be
    exiting about 20 percent of its inkjet business, a group that included
    bundling agreements that often saw retailers give away the
    printer.”When you give stuff away for free in bundles, oftentimes they
    don’t get used,” Lexmark Executive Vice President Paul Rooke told an
    attendee at a recent investor conference. “They kind of come with the
    deal and then they don’t get used. They get put in a closet, handed
    down to somebody or thrown out.”Though Lexmark executives have
    repeatedly said they’ll continue to do bundles that make financial
    sense for the company, Rooke appeared to be more cautious about free
    bundles recently.”You know when you give them away for free, there’s a
    better chance that somebody’s not going to use it versus some amount of
    conscious effort to pay something …,” Rooke told attendees at the
    Goldman Sachs 2007 Technology Investment Symposium.”If we do do
    promotional things, it’s where somebody has to make a conscious
    decision to pay something incremental for a printer,” he added later.
    “So, they understand that’s just not being thrown in as part of the
    deal. They can make a choice here and so they’re paying for it …,
    then they’ve got a better chance of using it.”Lexmark spokesman Tim
    Fitzpatrick said Rooke’s comments are “in line with our overall
    philosophy; however, each agreement will stand on its own merits with
    respect to the financial implications.”

    The free all-in-one
    the single-function bundles of old, packaging an all-in-one, which
    includes features like scanning, copying and faxing, could be a boon
    for the company.”The all-in-one has more uses, and a consumer’s going
    to tend to use it more and use more ink and buy several replacement
    cartridges a year,” said Tom Carpenter, a vice president and senior
    equity analyst at Hilliard Lyons in Louisville.”The important thing
    here for Lexmark is they were having a tough time in the low-end
    bundles … where people weren’t buying the replacement cartridges,
    which is where they make the money,” he said. “If they can gain share
    in all-in-ones, even the low end of all-in-ones where people are buying
    two or three replacement cartridges a year, that’s a profitable
    business for Lexmark.”

    In the case of the Best Buy bundle, the Lexmark printer offered is the X1270 low-end all-in-one.
    fact that it’s a low-end printer is not as problematic since it’s an
    all-in-one as opposed to if it was a single-function, said Carpenter,
    whose firm or its affiliates beneficially owned at least 1 percent of
    Lexmark’s stock as of Feb. 28.”Before, I think people that got the
    low-end inkjet bundle went out and bought a higher-end printer that met
    their needs more,” he said. “Given the multi-functions of the
    all-in-one, it’s more plausible that someone’s going to use this
    printer and, given the fact that it uses more ink, that’s good for
    Lexmark.”And just because it’s free to the consumer, it doesn’t mean
    Lexmark gets nothing upfront, he said.”They’re getting some money from
    their bundle partners or the retail store,” he said.Larry Jamieson of
    industry tracker Lyra Research said it’s also possible that Lexmark is
    simply looking to move old inventory.”The X1270 is nearly a year old,
    which is ancient for low-end products, and it was a $50 3-in-1 unit,”
    he said. “Lexmark would need to move this older inventory the best way
    it can, through bundles or television shopping channels like QVC. In
    this case, they are likely trying to get the old units off the books.”