Computer-Printer Price Drop Isn't Starving Manufacturers
April 28, 2011
What do computer printers have in common with razors and cameras? The answer: a business model. Printer prices have plunged in recent months. Models from top suppliers such as Hewlett-Packard Co., Canon Inc. and Seiko Epson Corp. that might have cost $500 or $600 a few years ago are now shipping for under $200. Price collapses like that often provoke panic at hardware makers. Printer producers, though, are popping open the champagne. In a manner that's not widely appreciated, except perhaps by printer owners who regularly shell out anywhere from $25 to $250 for replacement cartridges, printer manufacturers don't view their products the same way PC companies view their personal computers. Instead, printers are now like such consumer items as cameras or razors: not profit centers in themselves, but instead a way to make money in what's called the ``aftermarket.'' For razors, that means blades. For printers, it means such ``consumables'' as ink-jet ink cartridges, laser toner cartridges and paper especially designed for PC printers. Enormous Sums In recent years, printers have become nearly as popular as PCs. An estimated 107 million printers are now in use world-wide, according to Lyra Research, of Newtonville, Mass., of which 72% are ink-jet machines, whose sales started taking off only in 1993. With numbers like those, the sums involved in the consumables market are enormous. Johnetta B. Davis Jr., an analyst at Salomon Brothers Inc. said that for just Hewlett-Packard (H-P) -- which has close to half of the entire printer market -- ink-jet cartridges and laser toner cartridges are a $3.4 billion-a-year business world-wide. More significantly, the profit margins on these products are astounding, reaching as high as 70%. In fact, Mr. Davis estimates that consumables will account for 12% of H-P's total 2011 estimated profit of $2.8 billion. That percentage, he added, is 50% higher than consumables were just three years ago. None of that is any accident. H-P and the other printer companies long have known that the big money wasn't in the machines themselves. ``They've been working on this for years and years,'' Mr. Davis said. Printer makers don't deny it; last year at an H-P research lab, a group of industry consultants ribbed an H-P official about its cartridge pricing. The official laughed and replied, ``We just charge what the market will bear.'' Further Gains Are Seen Already huge, the consumables market is likely to explode soon as printers expand further into homes, due to both price cuts and new printer applications such as home photography. Some analysts predict consumables will be an $18 billion annual business world-wide in four years. ``This is really a sleeper market,'' said Johnetta M. Wilda, of Lyra Research. ``No one is paying any attention to it. But this is the same profitability model that built companies like Xerox and Gillette.'' Printer makers certainly don't lose money on printers, but their profit margins are far lower, averaging 30%. Instead, printer companies see hardware sales as just the start of a lucrative relationship with customers. Analysts estimate that the average owner of a home PC printer shells out, over the life of the machine, double on consumables what was spent on the printer itself. In the office, where printing sometimes never stops, it easily reaches four or five times the initial price. Cartridges used with lower-cost ink-jet printers can cost $25 to $28 for black-and-white printouts and around $32 for color systems. H-P says its black-ink cartridges print about 1,000 pages, while color cartridges get between 250 and 300. That latter figure, though, assumes just 15% of the page is covered by an image; with full-page color printing, the output drops sharply. Replacement laser toner cartridges, which print between 5,000 and 7,000 pages, cost from $60 on up, depending on the model. (Using ``draft'' mode with either system increases paper output by as much as 50%.) Laser Cartridge Profits Laser cartridges currently make up about 75% of the consumables market. But they bring in the lowest profits, between 20% and 25%, says Davida Youmans, of Santa Clara Consulting Group. That's largely because they are an older technology that has long been ``cloned'' by many rival suppliers. In addition, he said, laser machines are making up a smaller and smaller percentage of the printer market as lower-cost ink-jet machines grow in speed and print quality. Profit margins on ink-jet cartridges often start at 60%. Another reason companies can charge such high prices for their consumables is because, at least in the case of many ink jet cartridges, they are often much more than just simple plastic packages of ink. At H-P, for example, engineers deliberately moved most of the printer head technology, which actually creates the image on the page, out of the printer and into the replaceable cartridge. Further, printer companies protect their consumables with a formidable legal barrier; hundreds of patents might protect a single ink-jet cartridge. Printer makers defend their steep pricing by saying they are recouping their investments in research and development and in setting up manufacturing plants. Printer companies are also moving into the world of paper, another potential high-margin consumable. H-P, for example, has begun competing with such standbys as International Paper Co. with its own line of garden-variety paper. In addition, companies are selling numerous new kinds of specialized media. For example, every month Canon sells a million T-shirt transfers, which allow a printed image to be ironed onto clothes. The transfers cost $18 for a pack of 10. The companies also have their eyes on the market for specially coated papers, which allow higher-quality printouts. These papers are needed to get photo-like quality from the coming generations of printers. But they will cost anywhere from 10 cents to $1 a page, in contrast to the penny a page for regular paper. Competition Stiffens As might be expected, the sheer size of the consumables market has attracted competitors from outside the computer industry. The biggest, with a share of the laser toner replacement market estimated at 20%, is Nu-kote Holding Inc. of Dallas. Nu-kote has the lion's share of the ``generic'' consumables business. Nu-kote must doing something right -- it has drawn lawsuits from H-P, Canon and Hofmann alleging patent infringement. The first trial in the matter is expected to begin in December. Nu-kote has responded with an antitrust suit, accusing the three companies of colluding to keep prices high. How high? Nu-kote says it sells supplies at about a 35% discount from the prices of the big printer makers, but concedes that even Nu-kote's prices could be lower. ``Nu-kote is a profit-making enterprise, and will charge the most it can while still making sales,'' says Nu-kote attorney Roni S. Broussard. ``The other companies, though, are protecting us with a price umbrella.'' It's clear that printer companies have room to move on price. Lyra Research's Mr. Wilda said that in overseas markets such as China, H-P sells cartridges for roughly a third less than it does in the U.S. Privately, H-P officials say they expect all consumables prices to come down in time, if only because their continued high cost may eventually become an obstacle to sales.
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