Hello Kodak, Goodbye Margins?

By Greg Scoblete On Feb 26 2007 - 8:00am

Kodak's ability to fundamentally overturn the prevailing business model in the inkjet printer market hinges on how quickly they gain market share and on whether consumers are truly holding off on printing their images because of costs, say analysts and vendors.

If Kodak is successful, analysts say, its strategy could initiate a price war with the category's 800-pound gorilla, HP, which would eat into the heretofore generous margins associated with printer consumables.

"Margins on inks are very high — inkjet ink is more expensive than some fancy perfumes," said Steve Hoffenberg, consumer imaging research director, Lyra Research.

Kodak is undercutting industry prices by as much as 50 percent in some cases, said Andy Lippman, inkjet supplies research analyst.

Printer consumables sales (paper and ink) hit $13 billion last year, according to Lyra. In contrast, printer hardware sales reached $4 billion. While printer sales, including multifunction printers (MFPs) are projected to be flat through 2010, consumables will grow at a compound annual rate of 2 percent thanks to the existing installed base of printers, Hoffenberg said.

Despite Kodak's dramatic entrance, "it will be hard to know what impact they'll have until 2008," said Marco Boer, VP, I.T. Strategies. "They are entering the category late — it's already mature."

Already some vendors are pointing out that many of the cost-cutting approaches employed by Kodak (such as separating the print head from the ink cartridge) are not new and that they already have low-cost consumables to entice value shoppers.

"HP also offers print systems with color cartridges that cost as low $9.99," said Tuan Tran, HP imaging and printing group sales and marketing VP.

Central to Kodak's gambit of slashing into the margin-rich consumables market is the contention that lower prices will motivate more printing, which will in turn generate greater consumable sales.

"Kodak has the right message when they suggest that price is inhibiting printing," Lippman said.

While retail stores and many online printing services advertise 19 cent per print costs, home printing has traditionally been more expensive and the formula for deriving a "cost per print" murkier.

"Every photo is different. If it's in the daylight, there will be more white, which means less ink," Boer said.

Nevertheless, the emergence of value packs combining paper and ink to reach a competitive cost-per-print with retail printing have become increasingly popular. The leading consumable SKU in 2006 was just such a pack from HP, said Steve Baker, industry analysis director, NPD.

Canon has found that consumers tend to respond to the retail cost of the pack itself and not the advertised price-per-print, said Michael Duffet, printer marketing director, Canon.

Consumers have been more reluctant to embrace inks from non-OEM brands. Lower cost after-market inks from third parties account for roughly 20 percent of sales, Lippman said. Other cost-trimming solutions, such as inkjet refilling stations, have not taken off because of low customer awareness and reported difficulties with using the systems on the market, Hoffenberg said.

OEMs have also been defending their turf by arguing that long-lasting, high-quality photos can only be produced using inks and papers specially formulated for a select printer brand. They have also sued after-market suppliers for patent infringement and, in Canon's case, developed what Lippman referred to as a "killer chip" on several of its ink cartridges which the aftermarket suppliers have yet to be able to duplicate.

The chip was not purposefully designed to foil after-market suppliers but to support the company's Smart LED system, Duffet said.

Printer makers have also used their leverage with retailers to cull competition. This year, Staples quietly stopped selling its own brand of ink for HP printers, a move Lyra attributed to a generous incentive.

While not speaking to the specifics of the Staples deal, Tran noted that "as does any original equipment manufacturer, HP provides incentives to retailers that market HP products and educate consumers about the value of the entire HP printing system, including original HP supplies."

He added that the company "does not prevent channel partners or retailers from selling non-HP or refilled print cartridges." (Staples declined a request to be interviewed.)

That may be one large advantage of Kodak's entrance into the market, Boer said. "It will give retailers another lever on the manufacturers," he said.

Over the longer term, there is a question of just how strong demanded for printed output will be.

"We have a lot more ways to view photos now,"said David Haueter, photo printing trends associate director, InfoTrends.

Print volumes continue to grow because new entrants to digital photography keep their analog habits as they transition. Once digital becomes established, however, print activity per household drops, Haueter said. InfoTrends is predicting overall print volumes (including retail and online) to climb until 2010 when the market will peak at 16 billion prints. Thereafter, the firm is predicting a slight decline in overall volumes.

"We haven't yet sorted out what consumer's want to do with their photos," Baker said.