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 user 2003-12-11 at 9:04:00 pm Views: 47
  • #8179

     Lexmark and the printer industry struggle to defend their multibillion-dollar ink and toner business

    The printer Cartridge business makes up in cash what it lacks in glamour. Every Year people buy $40 billion worth of ink and toner, that sooty mix of pigment and magnesium powder used in laser printers. At Lexmark, the nation’s second-largest printermaker, ink and such made up half of the company’s $4 billion revenue last year and fetched the bulk of its $370 million profit.

    Good luck keeping the cash box. The billion-dollar fiefdoms dominated by Lexmark, Hewlett-Packard, Epson, Canon and other large printer manufacturers are under attack from thousands of small aftermarket outfits that collect empty cartridges and repair and refill them at a deep discount. Their share of the ink market is somewhere around 19%, says Lyra Research, with most of their captured territory falling in the corporate market, where orders can come in for thousands of refills at a time.

    Lexmark has been trying for several years with little luck to staunch the trade in empty cartridges. In 2001 it came up with a high-tech strategy. It developed a cartridge containing a microchip with a “secret handshake,” an authentication sequence designed to prevent unauthorized refills and disrupt communication between the cartridge and the rest of the printer.

    That protection didn’t last long. Static Control Components, a $250 million (2002 sales) Sanford, N.C.-based supplier of parts and toner to 5,000 U.S. remanufacturers, reverse engineered the Lexmark chip and showed it last fall at an annual industry conference. “Lexmark was livid,” says Edwin Swartz, Static’s chief executive.

    Lexmark filed a federal lawsuit in Kentucky, charging copyright infringement and violation of a 1998 law aimed at stopping digital piracy. Static turned for help to the U.S. Copyright Office.

    Patent law generally allows consumers to repair a patented device, even if that means doing a little reverse engineering. The 1998 law, however, is much stricter and prohibits “circumvention of technological measures employed by or on behalf of copyright owners to protect their works.” Its original aim was to stop online music piracy. If the law were to apply to the cartridge aftermarket, it could halt reverse engineering of all chips embedded in the dozens of different cartridges available on the market, not just the Lexmark chip.

    In October the copyright office ruled that Static was in a safe zone, provided it didn’t steal any code.

    “It’s a huge deal,” says Gary Pendl, whose $12 million Waukesha, Wis.-based Pendl Cos. is one of the 5,000 businesses that remake cartridges from Lexmark, HP and others. “Before the ruling, we were locked out.” Lexmark sells its T520/T522, a high-yield cartridge, for $373 on its Web site. Pendl, who claims his wares are equally good, sells a refill for $129.

    Static still has to prove in court that it didn’t violate any copyrights. It’s going to be a tough call. Lexmark says Static lifted its code. Static claims in part that the chip executes the handshake through the result of an algebraic equation, and equations cannot be copyrighted. Meanwhile, Static sued Lexmark in federal court in North Carolina for “anticompetitive conduct,” asking for $100 million in damages.

    Overall, things aren’t looking good for the big guys. The European Parliament ruled last year that as of mid-2006 all printers must come without disabling chips, to allow for recycling