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 uses a different strategy in its attempt 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 commoditised? Simply put, there’s a goldmine in the consumables. But players in the enterprise and small and medium-sized 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 salesforces. 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.
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. Hewlett-Packard (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 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 colour 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, the company 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, it expects colour page printer revenues to lead the way. It focuses on colour for good reason; pages printed in colour are expected to explode over the next years, and every colour page printed is more lucrative for vendors due to the higher cost of colour 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 on page 72 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 show a 1 per cent operating margin (HP IPG 13.2 per cent), while Lexmark claims a 6.8 per cent margin, Xerox a 7.1 per cent margin, and Dell a 5.4 per cent margin. Profitability dropped across the board, as vendors sacrificed profits for sales, but Xerox’s 61 per cent decline in profit balanced by only a 1 per cent 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/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 ecommerce and retail distribution.
Dell is attempting to move into the enterprise segment; we expect it to offer a colour A3 device in 2006 to assist in this effort.
Samsung is also expected to aggressively target the enterprise segment 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, revenues 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 per cent 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 per cent 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 per cent for colour and 30 per cent for monochrome page printers year-over-year, while the average price after promotion dropped 50 per cent for colour and 46 per cent for monochrome devices.
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 per cent in the summer of 2005, but colour 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 US 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 often 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. Colour adoption has been slow, and IT managers resist the challenge of "colour 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 and prime examples of companies limited by their product portfolios.
Brother needs to add colour 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 per cent in the first half of 2005. However, colour will take over the market sooner than later, and without compelling colour offerings, Brother will not be able to meet the needs of the most profitable customer segment, the enterprise. Brother must start 2006 with new colour engines, or it will be marginalised as a niche player.
Dell was blamed for commoditising the printer market by introducing low- and no-margin products to an industry that historically fed from higher margins. The Texas-based 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 use their strong brands to drive colour 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 enterprise’s 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 capitalise 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 in.
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 colour products in all the right places, will continue to increase lucrative colour installed bases and find sustained success.