LEXMARK & KODAK AREN’T SO COZY NOW

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Lexmark and Kodak aren’t so cozy now
They once were allies, calling themselves “a winning combination for digital photography.”But the story of Lexmark International’s relationship through the years with Eastman Kodak added a new, less cheerful chapter last week when the photography giant entered the inkjet printer market.Touting that it would be “changing the rules” of the inkjet industry, Kodak officials said the company’s lineup of all-in-one printers will use ink cartridges priced up to 50 percent cheaper than the competition’s. Ink is traditionally a high-profit margin item for companies such as Lexmark, which follow the industry norm of selling hardware for low margins or none at all.The “revolutionary” announcement, as Kodak called it, had observers buzzing throughout the week on which of the industry’s major players would have the most to lose.Many pointed to Lexmark, saying it could lose shelf space at retailers and would face more fierce competition in the lucrative inkjet all-in-one segment it has focused on recently.The Lexington-based company declined to comment on the move for most of the week, but it broke its silence Friday.”There is nothing revolutionary in the Kodak announcement,” said spokesman Tim Fitzpatrick.

Kodak’s offerings
When Kodak executives unveiled the company’s inkjet intentions last week, it was a formal announcement of the world’s worst-kept secret.Kodak had hinted at entering the inkjet fray for a few years. Expectations mounted after it hired current CEO Antonio Perez, who once led HP’s inkjet business, as president in 2003.The foray into inkjet is an evolution from its current portfolio of 4×6-inch photo printers.”Our snapshot printers are great printers if you have one, two, five prints … ,” Philip Faraci, president of Kodak’s Consumer Digital Imaging Group, told analysts Thursday. “The thing about inkjet is it’s the space where you not only can print great photographs but you can also print documents.”Kodak’s initial lineup consists of three all-in-ones — the Kodak EasyShare 5100, 5300 and 5500 — priced at $149.99, $199.99 and $299.99, respectively.Bob Ohlweiler, marketing director for Kodak’s worldwide inkjet business, called the pricing “competitive,” but, unlike competitors, Kodak expects to make a profit.”We don’t want to subsidize the printers,” Perez told analysts.In general, the industry follows a razor-and-blades model. Companies discount a printer (the razor), sometimes even giving it away, in order to build up a base of customers who then purchase highly profitable ink cartridges (the blades) over time.But Kodak plans to drop the cartridge prices (while still profiting on them), selling a $9.99 black ink cartridge and a $14.99 five-ink color cartridge.The company also plans to offer a paper and ink pack that promises 4×6 digital photos for “as little as 10 cents per print,” the company said.The 5100 and 5300 will be launched in March exclusively at Best Buy and then expand to other retailers. The 5500 ships in May. At Thursday’s conference, executives declined to name other retail partners.

A faded photo-print alliance
While Kodak’s printers will now sit alongside Lexmark’s on shelves, it wasn’t that long ago that the two shared a box.In 1999, the companies launched the Kodak Personal Picture Maker by Lexmark, which printed 4×6 prints, as well as using standard paper.Later that year, the companies announced a development and marketing relationship for photo inkjet printers.

Now they’re direct competitors.
What’s worse, some point out, is that Kodak is focusing on the all-in-one product segment (copy, scan and sometimes fax functions). It’s a segment whose users generally print more, and it’s an area that Lexmark has refocused its inkjet business on over the last year and a half.It’s also home to users looking for “photo quality, lower-cost ink and things like that,” said Larry Jamieson of industry tracker Lyra Research.”That’s kind of exactly where Lexmark would need to go and now you’ve got Kodak, which has got a really good brand name,” he said.”Given Kodak’s name, consumers might come in and ask for a Kodak product, which isn’t always the case for Lexmark,” said Tom Carpenter, a vice president and senior equity analyst at Hilliard Lyons in Louisville.And with a new competitor comes competition for space on retailers’ shelves.”It’s possible that any one of those guys that are there would lose one or two slots,” Jamieson said, adding that sometimes companies will have fewer products to fill those slots anyway, particularly as vendors look to exit some of the low-end single-function inkjet market.Fitzpatrick said Lexmark has not been told it will be losing space at Best Buy, where Kodak’s printers will be launched.

Competing strategies
The question remaining is whether consumers will take to Kodak’s proposition of trading upfront hardware discounts for cheaper supplies.Despite the higher price tags, the company’s printers are not revolutionary compared to competitors’ models, Jamieson said, though they do offer some value-added features such as Bluetooth capability, which could allow users to wirelessly print a photo from a camera.For consumers who print a lot, though, the supplies’ savings can be compelling, he said.Fitzpatrick said that Lexmark’s customers already enjoy ink savings and “have many options from Lexmark that are designed to fit their particular printing needs,” such as high-yield cartridges or multi-packs.”Ultimately it appears that what Kodak wants to do is replace a pay-as-you-go model with a prepaid model in which you pay a substantial premium and put more money in their pocket more quickly whether you use more ink or not,” he said. “So the only certainty about this model is you will pay more upfront.”There is room in the market for the two competing strategies, said Carpenter, whose firm or its affiliates beneficially owned at least 1 percent of Lexmark’s stock as of Dec. 31.”It will be interesting to see if the existing players maintain the business model that’s made them profitable or if they’ll make some tweaks in response to Kodak’s move … ,” he said. “It’d be surprising if they made wholesale pricing changes on cartridges.”One analyst asked Kodak officials whether they would eventually drop hardware prices and conform to the industry model if their plan failed.Kodak’s Faraci replied that “if I weren’t getting as much traction as I want … I might go down on my ink price rather than going down in hardware pricing and actually get more aggressive there since I still make very high margins.”The high margins on the reduced-price cartridges stem from Kodak’s decision to build printheads into the hardware rather than the cartridge, unlike HP, Lexmark and others.Ultimately, it will be years before Kodak’s success can be measured, but “it was important for Kodak to get into the market no later than they are now,” Jamieson said.”They still have an extremely strong name in photography. They needed to get in at this point before people started to forget who Kodak was.”

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February 14, 2007 at 11:07 AM