HP’S $12BIL INK BUSINESS PRINTING MONEY
HP’S $12BIL INK BUSINESS PRINTING MONEY
2004-04-14 at 10:36:00 am #5122HP’s $12B Ink Business “Printing Money”In a business park perched on a hill in northern San Diego, 1,500 Hewlett-Packard employees toil away in labs and cubicles with single-minded devotion. They create more than 700 kinds of ink every month, running 7,000 tests on each one. HP researchers know more about ink than anyone would ever want to know.
But then, they should. Ink is central to HP s lucrative printer-supplies business. In fiscal 2003, printer supplies — including ink and toner cartridges — accounted for more than $12 billion in sales, or about 16% of HP’s revenue, and made up for losses across many other product lines, including printers.
“HP’s ink business is the closest they come to printing money,” said Mark Stahlman, an analyst at Caris & Co., a research firm in New York.
The Palo Alto printer and computer maker has more than 100 different types of inkjet printer ink and laserjet toner ink on the market.
“I’ve spent 17 of my 20 years at HP on ink, and people will ask me if I’m done yet,” said John Stoffel, an inkjet technology manager who worked on HP’s first color printer.
HP said the $900 million a year it spends on R&D on ink is paying off against knockoff printer cartridges that sell for half the $28 average that HP charges.
So far, consumers and ink experts feel that HP’s quality is worth the price, particularly since the spectacular growth of digital photography is driving customers to seek printing perfection. But it isn’t clear if HP’s investments will become overkill, and if the ink being produced by competitors will one day rival HP’s.
Ink might seem like a lowly product in the computing hierarchy, but it’s “the center of the wheel” when it comes to quality printing, as HP’s Stoffel puts its.
The sprawling nine-building campus in San Diego houses millions of dollars of equipment that chemists use to mix ink, analyze its microscopic particles and test its effects on reams of paper — 300 kinds of paper, from photographic paper to papers unique to India or Japan.
Holly Zamoysky spends her time designing “inkjet fluidics,” staring at a strobe machine that magnifies images so she can see anything that goes wrong with a nozzle firing 36,000 droplets of ink a second.
To test how its ink holds up, HP has walk-in environmental chambers that simulate the air in Alaska or Singapore. Large whirring machines shine intense light on photos so HP can estimate how many years its pictures will last before they fade; the current estimate is 73 years.
On one wall is a picture of Robert Duvall in a scene from “Apocalypse Now” with a caption that mimics a line from the film: “I love the smell of ink in the morning. It smells like . . . victory.”
A single change in ink can affect everything related to printing because ink interacts with the paper, printer components and the cartridge. HP tests an ink’s compatibility with more than 100 kinds of plastics, adhesives, metals and other materials. Researchers pore over data from sophisticated equipment that shows them the shape of a dot or the atomic structure of paper as it absorbs ink.
A lot of things can go wrong. Humidity can throw off the shades of color for toner prints. The color can bleed if the ink droplets aren’t formed right. An inkjet cartridge nozzle smaller than a human hair can get clogged, making an image prone to streaks.
“Our message is that if you want to get it right, you have to view printing as a system, and that you improve it by looking at ink, paper, printing and computers,” said Pradeep Jotwani, senior vice president of worldwide supplies at HP.
HP’s expertise in printing supplies goes back to the 1970s, when it made plotters, the bulky machines that made engineering drawings with a robotic arm. When Xerox invented the laser printer in the 1970s, HP jumped into that market and took a leading share. HP launched its first inkjet printers in the 1980s, and the printing-supplies research got under way in earnest. The company has been formulating its own inks since 1982.
Today, HP holds more than 9,000 patents on printer-related inventions.
A high-end inkjet printer today is precise enough to heat up ink to several times the temperature of the sun, and shoot 36,000 droplets of ink through 512 nozzles each second.
In 1985, HP’s inkjet printer could shoot 1,200 droplets of ink a second through just 12 nozzles.
Besides San Diego, HP does printer and ink research in Corvallis, Ore., and Boise, Idaho.
The job of HP researchers is not only to beat rival printer makers, but also to outdo the companies that take discarded HP printer cartridges, refill them, and sell them at deep discounts.
“If we can’t do much better than the refillers, we aren’t doing our jobs here in research,” said Nils Miller, a senior scientist for ink and media at HP.
So far, HP is staying ahead, said Jim Forrest, senior analyst at Lyra Research, an imaging market researcher in Newtonville, Mass.
HP sold 328 million inkjet and toner cartridges in 2003, Forrest says. And ink refillers only have about 13% share of the market for HP inkjet cartridges. On a $28 cartridge, HP makes a profit of about $16.80, Forrest said, allowing it to sell its printers at a loss.
Razor, razor blades
“It’s a razor and razor-blades model, where you lose money on the razors and make money on the blades,” he said.
But rivals say they can match HP and possibly even undercut it on price. Steve Bolte, a research manager at Xerox (nyse: XRX – news - people ), says his company is also extremely diligent in creating inks and printing devices that can place more than 8 million dots per square inch on a piece of paper. Canon (nyse: CAJ – news - people ) and Seiko Epson also pour huge amounts of money into ink-related research.
Pantone, a digital color research company with 150 employees in Carlstadt, N.J., says it can team up with leading ink manufacturers to create high-quality inks that rival those from companies like HP.
“Ink is not rocket science,” said Richard Herbert, chief executive of Pantone. “It requires chemistry and science. Is it like putting a man on the moon? I don’t think so.”
HP dominates sales of inks and toners in part because it has sold the most printers, more than 270 million in all. HP has about 43% of the overall printer market worldwide, according to market researcher IDC.
All the attention to ink begs the question of overkill. Clayton Christiansen, a professor of management at Harvard University, believes that at some point, a product will become good enough for most customers and as a result price becomes the main factor in competition, thus undercutting HP’s advantage.
But HP still thinks its R&D will pay off.
“We tell our researchers a joke now and then, that they shouldn’t worry about an upcoming product launch,” said Stoffel, who emphasizes that a small change in ink can affect everything. “We say, don’t worry, it’s just an ink change. You’ll hear groans.”