Global market blunts razor-and-blades model
Prices for printer ink have been slashed by up to 70 percent as manufacturers struggle to get to grips with greater competition and more price-aware consumers. The most dramatic price cuts are so far affecting only regional markets, but insiders believe it is inevitable they will spread worldwide, shaking the $100bn-a-year imaging supplies business to its foundations, and bringing huge savings to heavy printer users.
Printer buyers all over the world are becoming increasingly aware that cheap inkjet printers – from manufacturers like HP, Epson and Canon – do not equal cheap printing. “We stopped using the printer when the ink was finished at New Years. New ink would have cost us as much as a new printer,” complains dissatisfied printer buyer, Don Martinez.
Inkjet sticker shock
“I got the printer mostly for my granddaughter to do homework assignments, but we did want to try it out. We printed up some photographs and internet pages, maybe too many,” California resident Martinez admits. Shockingly soon, he says, one of the printer's ink cartridges was empty, and it refused to continue printing until a new one was inserted. The next shock for Martinez was the cost of a new set of ink cartridges: more than $50. The Epson Stylus printer had cost $60 after a rebate.
“I feel almost like it must of cost a dollar for every page. I truly had no idea,” says Martinez, “I could afford to replace that one cartridge, but then another will be empty soon.”
Martinez, who describes himself as “not very technology-focused, not a cyber person”, had just been burned by one of the most profitable marketing concepts of modern times – the razor-and-blades model. Printers are sold cheap, to attract shoppers; but ink is expensive, to make a profit.
Like printing money
“A company sells a $100 ink jet printer and loses $30 or $40 on the sale,” explains Charles LeCompte, president of printer research firm, Lyra, “but every few months the consumer buys a new cartridge and the manufacturer makes ten dollars or so.”
“After 199 days, profit from the cartridges has made up for the loss on the printer, and after three years, the manufacturer has run up a tidy $160 profit.”
It's a neat little routine that has helped the imaging business increase sales steadily to $160bn a year worldwide. More than two thirds of that comes from supplies like ink and toner.
Consumers have had enough
But there's a big problem at the low end of the market. Consumers have stopped following the script. Deterred by sky-high ink prices, they're not printing enough – and printer makers are worried.
“For years, the high price of inkjet cartridges has kept consumers from freely using their printers,” admits Antonio Perez, Kodak's Chairman and CEO.
At the same time, 75 percent profit margins on ink have attracted a horde of so-called 'aftermarket' suppliers. These companies make compatible ink cartridges, and sell them at least 30 percent cheaper than the original printer maker.
Printer vendors like Epson say that cheap 'clone' inks fade quickly, and may also damage the printer. Independent tests do support the first of these claims, but it's hardly surprising that buyers of bargain-bin printers are also strongly attracted to the cheapest inks, even if the results sometimes disappoint.
If a customer doesn't print as much as expected, and then buys some cheap clone ink cartridges, the impact on printer makers' profits can be devastating. The printer maker might need to wait more than a year just to break even on a $50 printer sale, says Lyra's LeCompte. The lifetime profit from the printer could be cut in half, or worse.
“That's not enough for the overall business to be profitable. The razor-and-blades business model is broken,” he says.
Ink: 70 percent off
The first signs of real distress from the traditional printer industry are coming from Asia. Consumers in developing nations are especially price conscious, and clone cartridge makers there are strengthened by weak intellectual property rights enforcement.
Epson is now selling printer ink in Asia at just one third of US or European prices.
The company is strongly promoting its C58 and ME 2 series of printers as being the cheapest to use in Asia's developing markets, such as China and India. Lyra estimates their cost per page at around half that of printers from HP and Canon. A full page black and white print costs as little as 1.5 cents (US$0.015), according to data from Epson China. A color page costs less than 4 cents.
“If Epson succeeds [in Asia], HP and the others will have to copy Epson's strategy and offer very cheap consumables or abandon the market,” predicts LaCompte.
Cheap ink planet?
But Asia may be only the beginning, Lyra researchers say. “Epson has started a fire that will probably spread beyond China, and probably beyond the entry level ink jet segment,” LaCompte believes. “China is not the only country where consumers are thrifty. Even in rich America and Europe, consumers endlessly tell us that they are annoyed with the high price of cartridges”
LeCompte describes Epson's new strategy as “a brilliant counterstroke”. However, from the imaging supplies industry's standpoint, he says, it is “a calamitous development that will portend years of struggle, and adjustment to a new way of doing business.”
“This process won't happen overnight, but as vendors come under increasing competitive pressure, one will break ranks and move over to the Epson strategy. Like bulkheads on the Titantic, market segments and countries will burst one after the other as the pressure increases. And in the end, we think the consumables margins that the industry enjoys today will disappear from all but the most protected market niches,” he says.
Kodak starts the revolution early
Just a few days after LaCompte discussed these forecasts, Kodak announced that it plans to break into the global consumer inkjet printer market with half-priced ink cartridges.
“We are changing the rules in this industry to ensure that consumers can affordably print what they want, when they want,” said Kodak CEO Perez, in an announcement that appeared to herald the start of an ink price war.
Hinting at the size of the battle that is brewing, Perez attributes a large part of Kodak's New Technologies division loss of $211 million last year to the new printer project. Nor will the battle be a short one, Perez told analysts he is uncertain how soon Kodak can reduce these losses, which reached $71 million in the last quarter, given the need to take market share from entrenched rivals.