ANALYZING THE NEWEST LEXMARK BUNDLE

[Anonymous]

Analyzing the newest Lexmark bundle
FUTURE INK SALES SPUR ALL-IN-ONE GIVEAWAYS
If
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?
In
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
Unlike
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.
The
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.”

[Author]

March 21, 2007 at 10:14 AM