An interesting piece on All Things D points to a looming problem for HP: their once-vaunted printer business is seeing reduced revenues while it sees increased costs. HP’s printer business (and other printer manufacturers as well) was once a licence to print money. Why? Because it followed the same model as razors: give away the razor, make money on the blades. The theory is that you make money on the consumable part. For a long time, that worked fairly well. But it appears that the model isn’t holding up for printers over the long haul the way it has for razors. I believe there are three factors working against HP and their current model of super-cheap printers.
Less Paper and More Technology
The first thing that I think is working against HP is simply that people aren’t printing as much as they did. Some of it is likely environmental concerns, some of it is people just getting used to reading and dealing with documents on-screen. Increased use of social media has people accustomed to dealing with text on screens.
The second aspect is technological change, specifically the rise of the tablet. This, in concert with the first, can mean less need to print to paper, since you can just read it on a screen. I know that I don’t print nearly as much on paper as I used to. I still prefer to read something as I would a book or printed document, but now I “print” most documents to a PDF and read it on my iPad. Others are likely doing the same. It also means I cut down on the clutter in my office and home (no more scattered collections of printed manuals, proposals, etc.) It also means I know where the document is. There were times where it was faster to just print the thing again than to rummage through the piles of paper that accumulated. Now, I know it’s on my iPad, or could be on my iPad very rapidly.
Printers Cheaper Than Ink
My suspicion is that the third element is the biggest factor: the price of the printers. HP’s pricing on many of it’s cheapest (and highest volume) printers makes them cheaper than the ink that they contain. For a while, HP switched to “demo” cartridges, providing ink cartridges that were substantially smaller than the standard replacement units. Needless to say, people complained, because they saw it for what it was: a desire to get people to buy more ink. So, HP “did the noble thing” and went back to using standard ink cartridges in their printers.
But, printer prices continue to drop, to the point where it is cheaper, in some cases, to buy a new printer with full cartridges than it is to buy replacement cartridges for a printer you already have. I recently bought a printer as a gift, and the cost of the printer was about the same as the price of just the colour cartridge that it came with. Basically, I bought the colour ink cartridge, and got a printer plus the black ink for free. If that printer ever runs out, it would be more cost effective to put the printer in electronics recycling and buy another one, rather than replacing the cartridges. This is such a shame, and a tremendous waste, but the economic equation makes it a viable strategy for a consumer.
What does this mean for HP? Well, it means that they continue to see about the same sales volume when it comes to units moved. Rather than seeing a drop because of saturation, HP sees continued sales because people are simply disposing of the old printer (with no ink) in favour of a new printer (with full ink cartridges). But it means that their consumables business takes a substantial hit. And that business represents nearly 2/3rds of the revenue for the printing and imaging division.
But It Works For Razors…
But why does this model work for razors? Simple: the consumable part of the product doesn’t last that long. At least not compared to the ink in a printer. Most of the people I know might have to buy new ink cartridges every 12 to 18 months. Most razors give you anywhere from 1 to 4 weeks on a blade cartridge. That means replacing them 12-52 times per year, depending on the person. Buying a new razor with blades isn’t much different in cost than buying just the blades, so you continue to buy the blades.
The economics of the printer don’t work that way. In some cases, it is cheaper to buy a new printer than to replenish the ink it contains. Besides, most people don’t get attached to their printer the way they do to a computer or tablet. It’s just a thing you connect to your machine. Out of ink, but ink is expensive? Just buy another printer. It only takes a few minutes to set up, and you’re off and running until you buy another one. The newer ones are faster, quieter and offer better print quality anyways, so why not upgrade? The only “downside” (at least in Alberta) is that you need to take the old printer someplace to be recycled, but even that isn’t onerous: places like Staples happily take them for recycling. Otherwise, it’s all upside for the consumer: new ink, and a newer and more capable printer.
The Cost Of A Race To The Bottom
HP may have to rethink how they price printers. I don’t believe they can try the “smaller cartridge in new printers” approach again, just because I would expect some backlash. With printers being a commodity, people would just switch to a printer that contains full cartridges (and you can bet the other printer manufacturers would make a big deal about having “real” cartridges). The alternative is that they need to rethink how they price the ink. Ink cartridge prices are, quite frankly, outrageous. Given that it is a “monopoly” in the sense that you can only get HP cartridges from HP, it would seem natural that they charge as much as they think they can get away with. Yes, there are the guys that refill cartridges, but some people don’t have a lot of luck with that, and some of the newer cartridges have sensors that detect when it’s been empty, and it won’t necessarily report as “full” again. And by the way, there’s nothing illegal about it. If you don’t like HP’s approach, then buy a printer from Canon or Epson. It’s a free market (even if their policy is mean spirited).
The printer manufacturers have boxed themselves in with a race to the bottom on prices, and now HP (and I expect Canon, Epson, Lexmark and others) are starting to pay a price. Their ability to raise prices on printers is limited. Their next step may be to bring printer ink down to something less onerous. Lower prices means that people may be willing to keep their printers longer, and buy new ink, provided that ink is cheap enough. Even just making sure it is cheaper on one refill should mean increased volume on consumables, mainly because most consumers don’t think much further ahead than the current purchase. They won’t do the math and determine if buying new ink over the long term is actually cheaper than replacing the printer. What they’ll do is say “hmm, $80 for new ink or $70 for a new printer. Go with the printer”. Flip those numbers, and they are buying the ink instead. It’s the same short-term thinking that has people trading in perfectly good, nearly-new cars on more fuel efficient models “because they’ll save on gas”. They overlook that it will typically take 7-10 years in fuel savings to make up for the money left on the table when trading in a perfectly good vehicle early. They also forget that they won’t keep the car long enough to see those savings (the majority of people replace their car around every 5 years, at least in the U.S., according to data from Edmunds.com).
Without Change, The Decline Will Continue
Without a fundamental change in either pricing of printers or pricing of ink, HP can expect to see a continued decline in revenue, particularly from the consumables business. Printer prices are unlikely to go up (but anything is possible), and the more likely result is ink prices going down. Either way, the current situation will continue to encourage people to buy new printers over new ink, or reduce their use of paper altogether. The printer business was one of the lone shining lights in HP’s business, and that light is about to get dimmer without a rethink of the business.