INK inc.
HP is synonymous with printers. Apart from inventing inkjet technology and making laser printing affordable for the masses, HP has also managed to stamp its brand forcefully on the market. With almost half of the R923 million printer market in South Africa under HP`s belt, it is almost possible to forget that anyone else makes printers.“Fifty percent of our revenue comes from computers, but 50 percent of profit comes from printers,” says Eric Cador, senior vice-president at HP Professional Services Group for Europe, Middle East and Africa (PSG EMEA). “If you look at HP from a revenue point of view, we are a computer company; and a printer company from a profit point of view.”By contrast, Dell does not have an “invent” tagged to the end of its logo. Dell isn`t in the inventing game. For the third quarter last year, Dell put 1.3 percent of its revenue into research and development ($111 million), compared to HP`s six percent for the same period ($983 million). To even call Dell an IT company would be a misnomer – it`s a highly evolved sales and distribution model, with little interest in finding technology breakthroughs in a lab. (Hence the recent name change, from Dell Computer to Dell.)Despite the glaring differences in business models, HP and Dell are direct competitors in the PC and server market.And, with Dell announcing its intention to sell printers in South Africa next year, it is throwing the gauntlet firmly at HP`s feet.Dell will not be entering a friendly market. The overall market dropped by more than six percent last year, with an 8.4 percent decline in inkjet units sold.Furthermore, the market is heavily competitive. HP, Lexmark and Epson take the top three spots in the local printer market, with Canon and Oki following. There are more than 20 brand-name printing vendors vying for South African market share and, barring a few exceptions (Oki, Panasonic, Samsung, Gestener and Printronix), only HP and Lexmark managed to sell more units in 2002 over 2001.The hostile market conditions should mean this is a period of consolidation for vendors – not one of new arrivals. In a shrinking market, new entrants have but one option to gain market share – take it from someone else. Being the biggest player, HP is a likely candidate for Dell`s market share assault.But it`s not as cut and dried as that. When Samsung introduced its printers to South Africa, it jumped to eighth spot – but not to the detriment of the top players. And with Dell selling re-branded Lexmark boxes, some believe Dell will in fact eat somebody else`s slice of the pie. Neil Rom, MD of Oki`s sole local distributor Printacom, takes this view: that Dell will affect HP`s market share less than it will Lexmark`s.Hans Horn, MD of Lexmark South Africa, disagrees. “We think that Dell will take some form of market share out of the market if they are successful, but we don`t really see it as a cannibalisation of our own share. They`ve already sold HP and Lexmark printers for two or three years. There`s nothing new at the moment.”Continues Horn: “I don`t see it as competition for our normal business. It`s not a 90 degree turnaround. It`s not a potential threat for our market share… for others, maybe.” Cat amongst the pigeonsAs mentioned, rather than re-inventing the wheel, Dell is planning on introducing re-badged Lexmark printers to the South African market early next year. (There is no exclusivity agreement with Lexmark, meaning that it`s free to use anyone`s printers, even HP`s.) We can`t expect any new or exciting technology from Dell printers, although the company has developed some custom software for the products that will streamline the ordering of consumables, and none of the printing vendors expect a price war of any sort.Nonetheless, Dell is likely to take market share from someone, and the most likely candidate has to be the dominant HP. And Dell`s success to date in other market segments makes it a competitor to watch closely.Exactly what benefits another market player will deliver to the end user are still undefined. The margins are too tight at present to offer any chance of a price war, and since the printers are essentially re-badged Lexmarks, there won`t be any new technology available. But the option of dealing directly or indirectly with a printer supplier does mean more choice for the customer.“We do not expect competitors to react to our printer introduction, and we do not expect a price war,” says Dell South Africa MD Stewart van Graan.“Can you get a cheaper printer than R399? It`s already ridiculous as it is, so I don`t think we`ll have a price war,” agrees Epson MD Hans Dummer.But while printer prices have by and large hit bedrock, the consumables still offer some elbow room for price competitiveness. And with corporates (and individual consumers) looking more at total cost of ownership rather than the initial cost of the device, we might see some relief in this arena.“While Dell could make $914 million in 2003 and $1.4 billion in 2004 from printers and related supplies, the bigger market impact will come as early as 2004, when we believe Dell will become highly aggressive on supplies pricing,” says BMI-T analyst Loretta Pein. “Supplies pricing is the only segment of the hardcopy market that has barely experienced price erosion. Indeed, major vendors make half their revenue and more than half their profits from supplies. Growth in revenue and profits for the market would slow if significant price erosion began.”Paper and ink provides an annuity revenue stream, and the cost of replacing cartridges often amounts to more than the initial outlay for the printer. Vendors compete as much on product specifications as they do on cost per page, and consumers are wising up to the fact that the cost of running a printer is the most important differentiator between brands.Consumables are as important to the vendors as the actual printers – if not more so. Consumables have proved so profitable that all vendors now face a huge problem with the rise in refilling, compatible cartridges and fake brand cartridges, although they seem at a loss about how to stop the erosion.“Could this be Dell`s secondary goal – chipping away at HP`s profit engine?” asks Pein. Indeed it could.HP is predictably dismissive of Dell`s entry into the market, at least in the short term. “Dell is a very interesting entry to the market, but we don`t want to give it more priority than it really deserves,” says Zii Sithole, director of the imaging and printing group at HP South Africa. “Dell is not bringing any new technology to the table – it`s the printers that Lexmark has always sold, so there`s no major breakthrough in technology. Last year alone we launched 65 products. If they are to make a difference, it will be in four or five years.”Research group Gartner also dismisses Dell as an immediate threat. “Dell will have to change some entrenched habits, as it did with PCs. Users purchase 90 percent of printer supplies from retailers, not online. Small-office users, Dell`s target market, tend to disregard the cost of supplies and buy at the last minute, not ahead of time and in bulk,” say Gartner`s Peter J Grant and Ken Weilerstein.It might not be bringing new technology to the party, but Dell is introducing a very different business model. Dell`s direct sales strategy has proved more than effective in other areas of the IT market, and it believes it will have the same success in printers.When asked whether the direct model is viable for the printer market, Van Graan replies: “Yes. They asked the same about selling PCs [directly].”Printacom`s Rom believes there is a lot of value that the channel can still deliver. “We`ve often considered going direct. For some strategic accounts, we`ve given it a lot of thought, but we`ve still stuck with the channel. If we go direct we`d have to increase our headcount in order maintain the equipment. We`d need support staff, technical staff… there is definitely an advantage to going through the channel.“As for the customers, they have a relationship with the dealer. The channel has to be onsite at the end-user`s door all the time. We can`t look after 500 corporates. Obviously you`re paying a price for that, but for the margins that resellers make compared to what corporates get for that price, it`s not too much of a premium.”For all the advantages of going through the channel, there are equal (and sometimes greater) advantages of going direct, particularly when you`ve got the model down as pat as Dell has.Dell was so successful in the direct PC business that many attribute HP and Compaq`s merger to the need to fight off the upstart. It has also led to HP looking very carefully at the direct model, even though the company tends to deny any intention of skipping its channel.But whether the direct model will translate as well to the lower-value printer business is debatable.“Dell`s success in the PC is in the direct model. It works if you`re shipping $2 000 notebooks. But if you`re shipping a $30 printer, the same efficiencies do not apply,” says HP`s Sithole. “The channel is our strength, and it lowers the end-user`s cost of ownership. That very strength is going to make it difficult for Dell to compete with us. I don`t think there will be a lot of supply chain efficiencies they could bring to the table in the printer market.”Although HP certainly won`t openly admit that it is concerned, it is planning on being in a very different market space by the time Dell becomes a serious competitor. Its purchase of Indigo for $882 million bought it some very slick technology, called liquid laser, which will eventually be capable of pushing out 20 000 colour pages in an hour (currently the Indigo range churns out 4 000 to 8 000 per hour). So while Dell, Lexmark, Oki and Canon will continue putting printers on people`s desks, HP wants to get a bit more of the wider printing market.According to Sithole, digital imaging accounts for only about four percent of the total printing spend, or $23 billion. In five to ten years, HP hopes to be dipping into the remaining 96 percent of commercial printing. Approximately $300 billion is spent every year on printing advertising collateral. The potential revenue of even a few percentage points of this market is huge.The Indigo machines are vastly different from HP`s laser printers, and not only in performance. They can weigh over a ton and cost over $200 000. But they are not quite like the larger commercial printers in use today, either. The print run can be customised down to a single page, which means that a print run can have each recipient`s name on a brochure or publication, or that a single customised set of documents can be run out without the usual cost of starting and stopping the current class of commercial machines.HP sees this type of technology eventually filtering down to the news agent, where you could have your customised newspaper printed in seconds. At the moment, the product is proving popular amongst marketing firms and has a wide user base that includes label printers and the Idaho State Lottery.The best part of high-level printing for HP is that it can start to tie in a full solution with the printer. Users of Indigo typically need the database software and a hardware platform to run that database in order to get the customised results. The same ethos has driven the IT printing market for some time – a printer is of no use without a PC or server connected to it. That`s why printers are referred to as “peripherals” – the potential cross-sell between software, PCs and printers is very strong.A new cross-sell opportunity is starting to emerge in the printing market – linking printers to the network and, from there, to the Internet. This tactic is becoming more popular as the printer market shrinks, resulting in vendors and the channel trying to make more money off each device. “Connecting a printer to a network is a small step that can lead to sales of more software and services associated with the customer`s document needs,” says Pein in the latest BMI-T printing market report.“The corporates are saying: ‘I want to buy printing, not a printer`,” notes HP`s Sithole. “‘Don`t sell me a device, sell me a service`. Most people are cutting down on their IT budgets, and printing is seen as a cost centre. So we`ve developed a new go-to-market model, which offers integrated services. We see ourselves as an enabler to make customers grow their market share and profit. Now printing is no longer just a device, it`s a service.”While Dell will most likely become a serious player in the printer market in a few years, HP is unlikely to be toppled from its printing stronghold any time soon. While Dell will, undoubtedly, have a big impact on the direct printer supplier market, HP`s continued success on the desktop will be decided by how the customer chooses to interact with his printer and consumables supplier in the future. Who knows, maybe HP will choose to move its cheese elsewhere, to safer ground, far from the Dell-ified crowd.
