Commentary & Analysis
Mass Extinction and the Imaging Industry
By Ed Crowley,
By WhatTheyThink Staff
Published: May 23, 2005
By Ed Crowley, Photizo Group In an industry where a single point of share can drive over $50M in revenues, capturing share and building an installed base is critical. March 17, 2005 -- A common view among paleontologists is that the mass extinction of the dinosaurs was due to some cataclysmic event which made conditions so intolerable to dinosaurs that they simply died out in mass. So, as we look at the imaging industry, is there anything that could happen which would cause a fundamental shift in market conditions and result in a 'mass extinction' of printer companies (i.e. the proverbial 'meteor' of the imaging industry.)? Over time there have been several trends and events that were heralded as a turning point and potential demise of the imaging industry. This is a partial list of the potential 'meteors' for the imaging industry: The office goes 'paperless'. Due to the ease of creating, sharing, and viewing digital documents – there will be no need to actually print a document. Dell enters the market bringing hardware and supplies pricing down to unprofitable levels in order to drain the profit pool of arch-enemy Hewlett Packard. The net result is everyone gets caught in this battle of the giants and the profitability for the industry as a whole falls to unprofitable levels. Advertisers and end users move to a model of distributing documents (including coupons and advertisements) electronically to be printed out by the end user at their local desktop or workgroup printer. As a result, all but the largest of local print shops disappear as their page volumes (and revenue) shift to distributed workgroup printers. What about the collision of the printer vendors and the copier vendors? These two vendor segments have traditionally had significantly different business models in terms of how products are purchased (outright sale versus click charges), what channels carry the products (traditional IT reseller versus BTA resellers), and 'low touch' products (minimal need for service or support) versus 'high touch' products (regular interventions for service and support). What if the printer industry business model wins out? Will copier companies be able to compete? What will happen to 'printer' vendors if the copier industry business model wins? The market shifts to one dominant technology (mono lasers, color lasers, inkjet printers, multifunction printers, or digital copiers) leaving the companies without access to that technology out in the cold. This is the perennial fear of manufacturers: being the 'one guy' left selling dot matrix printers when the market has shifted to laser printers. At different points in time over the last five years, each of the above possibilities has created a considerable amount of angst in the imaging industry. As well they should. The stakes are incredibly high. The barriers to entry for manufacturing are significant. Developing printing engines is an expensive proposition which requires significant technology expertise, intellectual property rights, and huge investments in capital and personnel resources. The potential rewards can be massive. In an industry where a single point of share can drive over $50M in revenues, capturing share and building an installed base is critical. "Ed's" Basic Tenets of Market Dynamics: So which, if any, of these events is going to be an 'extinction level event'? And which are just going to drive changes in competitive positions and profitability? Before I respond, let me state "Ed's" basic tenants of market dynamics: Over time, markets tend to change much more slowly than many of the industry pundits predict , resulting in a sense of complacency among established firms based on a series of missed predictions for dramatic market shifts. Rather than going through a sudden change, markets tend to evolve based on multiple simultaneous subtle changes to the underlying industry dynamics. These subtle changes eventually converge to create a fundamental shift in the industry. Once a market does go through a fundamental shift, the change often occurs quickly with unexpected speed. During this fundamental shift, the incumbents are almost always at a disadvantage since they are caught by surprise (see point number 1) and they are 'locked' into supporting their existing customer base. Additionally, firms tend to develop 'paradigms' for how they view the world that become fixed and usually miss the subtle changes leading up to the fundamental shift. My belief is that no single event will be an 'extinction level' event. Rather, several of these factors will collide and ultimately achieve a level of critical mass which results in significant and rapid change. So (to stretch the analogy further), extinction will not be caused by a 'meteor hit', but rather, by 'global warming'. In this scenario, multiple trends converge with each trend being noticeable, but not significant enough to cause wholesale change. However, once these trends converge, the climate will change rapidly and those vendors that cannot adapt will perish (or be marginalized). What if. . . ? There's no single 'extinction level' event, but several colliding factors will achieve a critical mass resulting in significant and rapid change. For example, Dell has not had the significant impact many industry pundits expected in terms of driving super aggressive price points and the draining of the profit pool. But could this change? How will their behavior be affected by HP's struggle to repair profits for their imaging division and re-start growth for this key division? What if HP spins off the IPG (printer) division, how could this change HP's behavior in the imaging market? And what about changes in user behavior? Will entrants to the workforce ten years from now be more comfortable with just using electronic documents without printing them? How will this impact Dell's behavior? Could these market dynamics collide to create an impetus for Dell to become hyper-aggressive in their printer and supplies pricing? Even as markets go through significant changes, some vendors will survive and even thrive. So is the future bleak? Not at all! In fact, even as markets go through significant changes, some vendors will survive and even thrive. For example, vendors who have already invested heavily in color laser printer development will benefit from the dramatic shift to this technology. Likewise, by utilizing new digital imaging technologies, some local print shops will successfully capitalize on the 'distribute then print' model by providing premium services for very short production runs and variable data printing. However, those firms that are not able to adapt, and who are not cognizant of the potential impact of the converging trends will find themselves struggling in the new environment. For example, if a vendor's financial profits derive primarily from monochrome laser printers and inkjet printers, they will be struggling if the market shifts quickly to color laser technologies due to (sudden aggressive competitor pricing) lower margin models for hardware and supplies. Firms that are not able to adapt, and who are not cognizant of the potential impact of the converging trends will find themselves struggling in the new environment. So how does a firm stay ahead of trends? It must have two things: 1) a system for having a 'complete' and up-to-date understanding of the market dynamics (including customer trends, competitor trends, market forecasts, and business intelligence); and, 2) an ability to craft and execute an effective product strategy based on this market understanding. This is where marketing intelligence (integrated system for market understanding) and product strategy management (crafting and executing the product strategy) have very symbiotic relationships. Without good marketing intelligence, you are flying blind in developing and executing your product strategy. Without an ability to define and develop a winning product portfolio, even the best marketing intelligence will be of minimal value. Our mantra of 'the market is only going to become more interesting' continues! While the changing environment will drive some vendors into extinction, it will present new and exciting opportunities for those vendors that are able to adopt and evolve to the new market conditions.