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 user 2007-03-21 at 10:13:00 am Views: 64
  • #17623

    Analyzing the newest Lexmark bundle
    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.”