*NEWS*THE CUTTROAT PRINTER *INK* INDUSTRY

[Anonymous]

Not Everyone Can Win in the Cutthroat Printer Industry
December  2005
Once
a cash cow for hardware vendors, the page printer business has become
cutthroat, and many traditional industry leaders are struggling to show
a profit. Virtually every vendor utilizes a different strategy in their
attempts to succeed, but operating margins are dwindling across the
board. Why do manufacturers continue to spend billions of dollars
developing technology, only to shove it into a piece of hardware that
has been commoditized? Simply put, there’s a goldmine in the
consumables. But players in the enterprise and small- and
medium-business (SMB) workgroup segments will fare much better than
those that cater to environments with low print volumes.
Page
printer hardware margins have long been slim. The past 18 months have
been especially harsh, with price decrease percentages in the double
digits and subsequent profit declines in almost every category. Vendors
are scrambling to find the strategy that will work best for them. Some
target the lucrative enterprise business with extensive partner
networks, intricate distribution channels, and hearty direct sales
forces. Others leverage their image as a well known consumer brand in
attempts to capture a piece of the vast retail printer business. While
strategies differ, one thing is for sure: printer vendors will have to
grow their installed bases significantly over the next four quarters if
they want to survive on revenue from consumables.
Latest financials show latest struggles
Some
recent printer vendor financials confirm this dangerous outlook. The
numbers signal strained increases in revenue and depleting operating
margins.
The situation is not specific to a single company; the
declining operating margins are widespread. One-time charges and
restructuring fees have negatively skewed outcomes, but even
cosmetically enhanced non-GAAP numbers reflect unhealthy operating
margins. HP (consolidated) operates at the lowest margin, and the high
operating margin of the company’s Imaging and Printing Group (IPG)
explains why investors have been trying to persuade management to split
the unit off.
While Dell’s entry into this business over two years
ago certainly hasn’t helped matters, it is not the only reason for
everyone’s issues either. A number of vendors, such as Samsung and
Lexmark, have benefited greatly from their association with Dell. They
have sold their printer engines to the direct giant under agreements
that have been lucrative in terms of unit sales.
Dell continues to
expand its installed base, primarily focusing on color printers, with
little regard for hardware profits. According to a Current Analysis
Labs (www.currentanalysislabs.com) report for one of Dell’s key
products, the estimated total manufacturing cost of the Dell 3100cn is
$497.59 (assuming the piece is manufactured in China at a volume of
250,000 units per year). Dell sold the printer for as little as $384,
and although it has since returned the price to $499, Dell is still
playing a no-profit game.
Unfortunately, many vendors do not have
the same luxury of foregoing profits to increase their installed bases.
Dell sees printing, along with managed services, as its chance to reach
its $80 billion revenue target by 2008. More specifically, Dell expects
color page printer revenues to lead the way. Dell focuses on color for
good reason; pages printed in color are expected to explode over the
next years, and every color page printed is more lucrative for vendors
due to the higher cost of color toner than a monochrome page.
Even
though the industry talks about Dell’s aggressiveness and how it
continues to play the game without regard for current profit growth, it
is not the only company that sacrifices short-term profits. The chart
below compares the percentage change in profit, revenue, and operating
margin from the last reported quarter and the same quarter a year ago
for a number of vendors. HP’s consolidated results showed a 1%
operating margin (HP IPG 13.2%), while Lexmark claimed a 6.8% margin,
Xerox a 7.1% margin, and Dell a 5.4% margin. Profitability dropped
across the board, as vendors sacrificed profits for sales, but Xerox’s
61% decline in profit balanced by only a 1% growth in revenue
illustrates the danger of such a strategy. How much longer can vendors
wait for future consumables sales to pick up before they must change
their strategies?
Different strokes for different folks
With
profit being so elusive, it’s no wonder that different vendors target
different segments. HP is the only vendor that can claim that it is all
things to all people in terms of printing. Brother currently targets
the low-end mono segment, primarily through retail, while Dell and
Samsung target small offices/home offices (SOHOs) and SMBs via
e-commerce and retail distribution. Dell is attempting to move into the
enterprise segment; we expect it offer a color A3 device in 2006 to
assist in this effort. Samsung is also expected to aggressively target
the enterprise in 2006. Lexmark has traditionally targeted the low-end
single function inkjet and enterprise printing segments. However, with
the single function inkjet market in decline and Lexmark’s high prices
in the laser segment, the company has seen a steep decline in profits,
revenue, and operating margins. Ricoh continues to be primarily a
player in the enterprise segment, piggybacking on its large copier
channel.
Retail has not turned into the page printer playground that
many vendors had hoped. While pricing has declined by as much as 50% in
some segments, unit sales have not increased across the board. All this
is compounded by the tremendous expense that vendors face to get their
products into the retail channel, let alone be successful once they get
there. The steady decline in retail page printer pricing since the
spring of 2004 has not been offset by steady increases in unit sales.
In fact, unit sales in July and August of 2005 were down year-over-year
even though average selling prices decreased nearly 10% across all
business printing categories.
However, this doesn’t mean that
vendors are giving up. The number of individual promotions over the
2005 Thanksgiving weekend increased 42% for color and 30% for
monochrome page printers year-over-year, while the average price after
promotion dropped 50% for color and 46% for monochrome devices.
So why aren’t more SOHO and SMB consumers purchasing single function page printers?
As
pricing began to decline significantly at the start of the summer of
2004, early adopters began to jump on board. Over the next three
quarters, many of the consumers that had an interest, or a need, for a
single function page printer made their purchase. When pricing dropped
by double digits, those who were going to purchase did so. Pricing
dropped another 20% in the summer of 2005, but color page printers were
still a few hundred dollars and consumers weren’t biting.
Low-end
monochrome page printers were a different story because many dropped
below the $100 mark. Monochrome single function printers have found a
place in U.S. homes as accessories to photo-specific single function
units. Unfortunately, page printer vendors have not been able to
persuade SOHO and SMB users to increase their print volumes, which is
essential for justifying the cost of entering highly price competitive
retail in the first place. The price transparency in retail forced
manufacturers to lower hardware prices in order to move units , but the
low print volumes many times result in consumables revenues too low to
make up for the profit lost on the hardware.
Vendors that target the
enterprise space face their own challenges. Color adoption has been
slow, and IT managers resist the challenge of “color print management.”
Some traditional printer vendors lack the product portfolio to compete
against vendors with total solutions for printing and copying needs.
Brother and Dell are the most notable are prime examples of companies
limited by their product portfolios.
Brother needs to add color
engines fast. The company found success in low-end monochrome and
all-in-one machines, market segments that other vendors neglected. The
two sold very well for the company, growing Brother’s sales and
operating income approximately 8% in the first half of 2005. However,
color will take over the market sooner than later, and without
compelling color offerings, Brother will not be able to meet the needs
of the most profitable customer segment, the enterprise. Brother must
start 2006 with new color engines, or it will be marginalized as a
niche player.|
Dell was blamed for commoditizing the printer market
by introducing low- and no-margin products to an industry that
historically fed from higher margins. The Texas company has most
segments covered, but it will need to add an A3 machine to be able to
address enterprise client needs. Without A3 and multifunction offerings
to complement basic single function page printers, vendors will
struggle to sell in the enterprise environment.
Brand identity is
also essential in the enterprise segment. Vendors such as HP and Xerox
utilize their strong brands to drive color into areas that have high
page volumes. HP certainly benefited from an early start in the
monochrome segment, but its quality and service capabilities are the
reasons why so many customers stayed with HP over the years. Xerox
leveraged its stellar image from the copier market to transition into
the single and multifunction printing market and up-sell existing
satisfied enterprise customers with single function page printer
machines that account for much of the enterprises page volumes.
And the winner is?
All
printer vendors face challenges in both the retail and enterprise
environments. The solution for most vendors lies in their abilities to
capitalize on their strengths. Regardless of the sector of focus, one
thing remains true: consumables sales are essential to survival. For
that reason, until page printer vendors are able to successfully change
SOHO printing habits via increased functionality, only vendors that
penetrate the high-volume SMB and enterprise segments will find
sustained success. While Brother continues to prove that concentrating
on a specific segment can be fruitful, a diverse product portfolio and
the ability to penetrate spaces that have high print volumes are the
essential ingredients to any vendor’s long term success plan. Dell will
need to show some profit sooner than later or investors will lose their
patience, although stellar supply chain management, combined with
tight-fisted supplier relations, gives Dell a cost advantage. However,
other manufacturers are closing in when it comes to price, and it is
essential for Dell to leverage another advantage, its vast customer
data, to keep consumables revenue coming. However, Dell has a very
limited portfolio, and its service offerings and partner relations in
the printer segment are still rudimentary compared to those of the
established players. For that reason, HP and Xerox, which are expanding
with profitable color products in all the right places, will continue
to increase lucrative color installed bases, and find sustained
success.

[Author]

December 24, 2005 at 10:30 AM