Arik Hesseldahl

Recent Posts by Arik Hesseldahl

There’s a Storm Ahead for HP’s Printer Business

When the troubled IT giant Hewlett-Packard reports its quarterly results tomorrow, most analysts expect it to come through and meet — and perhaps even beat — some already diminished expectations.

Yet HP is facing a significant problem in a key market: Printing. HP’s Imaging and Printing Group, or IPG, accounts for roughly 20 percent of HP’s revenue, making it a bigger business by revenue than the enterprise and server, storage and networking businesses.

As it does with most printer vendors, the business model of IPG works like this: HP sells a printer, more often than not at a loss, then makes up for the loss by selling the customer ink and other supplies over the next several years of the printer’s useful life.

In this business, HP is the king. In a survey of the state of the printing market issued last week, the market research firm IDC pegged HP’s overall share at north of 41 percent. In 2011, by IDC’s reckoning, HP sold more than twice the number of printers as its nearest rival Canon, and more than the combined unit sales of its nearest three rivals — Canon, Epson and Samsung.

So what’s the problem? The printing business is on the wane. For all of 2011, combined sales grew by 0.7 percent, according to IDC, and what little growth there was didn’t go to HP. IDC says HP’s printer shipments declined by 0.7 percent last year, while Canon, Samsung and Brother all saw their shipments grow.

And sales in key market geographies make the picture look even worse. In the U.S., for example, IDC says the market for printers in 2011 contracted by 9 percent, while HP’s unit sales plummeted by more than 12 percent. On a unit basis, IDC says, HP sold fewer than 4.2 million printers to U.S. customers, compared to 4.8 million in 2010.

Slowing hardware sales are only the leading edge of the problem. Remember that HP takes a loss on every printer it sells and makes it up on much more profitable supplies. Here’s where the numbers start to look scary: As overall revenue in the IPG was essentially flat year on year in 2011 — sales were $25.78 billion in 2011 versus $25.76 billion in 2010 — sales of supplies declined.

That may not seem important, until you realize that sales of supplies account for more than two-thirds of IPG’s revenue: Printer supplies are a $17 billion annual business that had been growing until 2011 when sales headed south. Sales of ink cartridges tend to track sales of new printers on a six- to nine-month lag, but there’s also a long tail that feeds into the existing installed base. Printers can stay in service for years, gobbling up ink.

A decline in ink sales can have an outsized impact in IPG’s profitability: Operating margins in IPG declined from 17.1 percent in 2010 to 15.4 percent in 2011.

And if market trends weren’t enough to drag down HP’s printer business, there are economic ones, too. Canon manufactures key parts of HP’s LaserJet printers in Japan. That caused two significant problems: Logistics costs increased as a result of the earthquake and tsunami that hit Japan last year. Meanwhile, the strength of the Japanese yen relative to the U.S. dollar is adding even more incremental costs.

The bottom line: Printing has been one of HP’s long-term strengths. If people are printing less, they’re buying fewer printers. And if they’re buying fewer printers, they’re buying less ink. All of it is bad news for the world’s biggest printer company. We’ll see just how bad on Wednesday, when HP reports its latest results.

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Another gadget you don’t really need. Will not work once you get it home. New model out in 4 weeks. Battery life is too short to be of any use.

— From the fact sheet for a fake product entitled Useless Plasticbox 1.2 (an actual empty plastic box) placed in L.A.-area Best Buy stores by an artist called Plastic Jesus