Commentary & Analysis
Questions and Answers from Last Week's Webinar
We had an exceptionally active question and answer session during our Economic Outlook webinar last week,
By Dr. Joe Webb
Published: March 31, 2008
We had an exceptionally active question and answer session during our Economic Outlook webinar last week, and unfortunately not enough time to get to all of the questions during the webinar. Because of the volume of questions and the importance of the information contained in the answers, we decided to use them as this week's column. Enjoy!
Q. Do you think printing volumes will ever come back to 2005 levels, or will electronic media remain a strong part of the entire promotional makeup?
A. Electronic media are in their infancy; we have yet to see or understand the full nature of their impact or scope. They are not going away. There is also a great deal we don't know about the way online and offline media interact, and what synergies they may have. There is some research, and again, I recommend the book What Sticks for some understanding of it, but the situation is very fluid. Online is a very competitive place. Technologies to access data online are changing constantly. Habits in new media are barely ingrained when new methods or new gadgets reshape those habits and preferences yet again.
Remember that 2005 printing levels were not all that good in the longer view, but more like a brief respite from a longer term secular decline, which I believe will continue for a very long time. During that period, there will be process shifts (offset to digital (including inkjet), and older ones such as gravure to web offset, more flexography in packaging, etc.) which will all occur at subtle rates that can best be discerned from a long-range perspective. The bigger advances may actually be internal to the running of print businesses as administration and selling get technology boosts because of overall advances in business computing and communications. For right now, the technologies of printing are well known. Inkjet may be poised to make some inroads, but even those will take time. I remember the great digital printing scare of 1993 and the direct-to-plate panic of 1980. We saw those technologies take a long time to become commonplace, and even the technologies they displaced had a long period of coexistence or still do.
Remember, the commercial printing market, even in its decline, is still large, with enough process and technological shifts, and changes in client preferences, for there to be sizable opportunities for those who find them or create them.
Q. How do you see digital readers impacting the printing market? In particular, I mean Amazon Kindle and the Sony Reader, and I think others are on the way. Only Amazon seems to offer regular print newspapers and magazines on the Kindle. Do you think this market segment is going to explode and how do you see printers and publishers leveraging themselves to be a part of it?
A. There won't be any explosion, just the continued gnawing away at consumer time and preference to seek and view information on digital displays. The Sony device is disappointing, with poorly labeled controls and a badly built e-store. The Kindle shows a far more insightful design, with creative use of connectivity and a wider range of services. It also is Linux-based, which is always a pet topic of mine.
Of all of the market-changing devices, history will look back at the Apple iPhone as a turning point. The next boost to the market will be the Google-inspired device, due sometime later this year or early 2009. Supported by a consortium of software, hardware, and communications providers, this project, called “Android,” will broaden the market for handheld computing and communications to a yet higher level.
Other small devices with an eye toward connectivity include the Asus Eee; the company expects to sell 5 million units this year, worldwide. The typical configuration sells for $400. About 60% will be Windows XP-based, with the balance using Xandros Linux. Other products include the Intel Classmate, Everex Cloudbook, and the OLPC (One Laptop Per Child) computers. The Everex and OLPC run Linux. There has also been significant progress in the development of 3D applications that make reading and navigating on these devices easier and more like a book or magazine. FFEI, the FujiFilm Graphics spin-out, and Dalim’s Virtual Library are two examples.
A. far as publishers being part of it, they own the content, and they are anxious for these devices to work but have no real clue yet of what the revenue stream can or even should be. Printers should be investigating these devices, even for their small customers, and helping them create files of their content to be viewed properly. There is need for images and content to be optimized to take advantage of the features and address the limitations that these devices have. Unfortunately, I can't name a single printer who does this (or who even might own a Kindle), so I would be interested in hearing from them if they are out there.
Apple has a page that guides developers in the creation of web pages and other formats for best viewing on the iPhone. One can easily envision any of these handheld devices being used by tourists to find restaurants, check the hours of a museum, and get maps and instructions about how to find them. The industry has an opportunity to create and manage content for mobile computing on behalf of clients, but again, most shop owners, from what I can tell, barely use existing Internet capabilities themselves. The idea that you would use a cell phone for anything other than a phone call seems alien to them. Much of it is a function of age and habit, but it's the sea of connectivity and gadgets that are changing the information deployment marketplace, and we'll have opportunities to help our clients get access to it, if we choose to. They're not going to think of us providing those services if we can't envision it ourselves.
Q. What do you expect consumable material pricing will do in the next few years? Increases at what levels?
A. One never really knows how these will pan out because there are often substitutes for products that can be made to reduce the total costs, such as lower price paper grades or changing the sizes of print jobs or their quantities. There are also changes in processes that eliminate the consumables, such as direct-to-plate eliminating graphic arts film, or desktop publishing eliminating phototypesetters and phototypesetting papers, as well as phototypesetting personnel.
But that's not the way to plan because those changes are not always available, or other factors come into play. Budgets should be built using an assumption that overall consumables prices will increase at twice the consumer price index, at a minimum. Right now, that would be about 9%. Obviously, some will be higher, others lower, but it will probably settle out there as an average.
Q. Of the 300+ responding printers [in the survey discussed in the webinar], approximately what percentage are small, medium, and large?
A. The following is the breakdown by employee size of the 334 U.S. commercial printing respondents:
The percentages in the slides presented were weighted to the demographic profile of the industry. That is, since plants with 100+ employees represent only 4% of the shops in the industry, we weighted it that way in the calculation of the grand total response so it would reflect the number of commercial printing establishments. Occasionally we use different weighting schemes when it makes sense to do so, such as weighting responses for certain questions by the share of industry shipments that each employee size category represents. This is necessary for a variety of statistical and analytical reasons not worth discussing in great detail here. They are often needed to deal with issues of forecasting the market, to account for things such as plants with 50+ employees being less than 10% of the printing establishments, but representing 70% of the industry's capital investment.
The full tabulations of the survey, weighted and unweighted, will be appearing in upcoming columns, charts of the week, and in special reports. The responses in individual employee size categories are remarkably enlightening. We also have calculations related to whether companies are part of multi-plant operations, and analysis by various aspects of the “green” questions we asked, as well as by geographic region. One of the services of the WhatTheyThink Economics & Research Center is to provide custom tabulations of these data when requested. Please contact us for an estimate of fees.
Q. You mentioned printing has been in a recession for the past three quarters. How long do you think it will last?
A. Get used to it; it may not come out, and if it does, real growth will never be higher than 1.5% to 2%. Individual companies can do well because they will take business from competitors who are weak or go out of business, from consolidation, or from a superior business strategy or offering. Just because the industry may not be attractive does not mean that entrepreneurship is dead.
Q. Do you see DIGITAL mail printing still growing rapidly, even as TOTAL mail printing declines? Is there still a growth opportunity for digital printers?
A. In terms of processes, digital printing is the only bright spot, and it is securing a greater share of the declining mail volume you mention.
Q. Any comments or observations regarding the "quick printing" industry?
A. The biggest issue here is the competition from office superstores, people's home and office print capabilities, and the ability to access information without printing it. The latter is a matter of technology, familiarity, and preference. It's a bigger factor than most realize.
For the past several years, the number of net new businesses (births less closures) has grown in a range of 60,000 to 90,000 per month. Yet the only company I see addressing this market aggressively, other than FedEx Kinko’s and the office superstores, is Vistaprint.
Q. What is the increase for first class 1 oz.
A. The rate goes to 42 cents. Full details are on the USPS site.
Q. Do we have access to total dollar shipment divided by number of printers each year? In other words, how did the average shipment per printer in dollars changed from year to year?
A. We do have this, and we'll publish the information as charts of the week shortly, perhaps even this week.
Q. With this forecast many commercial printers will be out of business. Do you think the printing market can clean itself up and have price increase and market growth in a future? Less players but better margins?
A. It's not the forecast that's the issue; about 1,000 commercial print businesses have exited, per year, for about 15 years, so this is nothing new.
Clean itself up? The purging has been going on for some time and is basically a function of declining total print volume.
Price increase? As long as digital media exist and the costs of communications, computing, storage, networking, and other technologies keep declining, absolutely not.
A. far as margins go, that's up to the individual companies. Industry profits have been lackluster for eight years, and they'll be that way for quite a while.
Q. Where do you see the package /label printing sector going?
A. Packaging generally grows with population (about 1% per year) and then with an increase in the wealth of those households (another 1% to 2%). It generally does not grow with GDP on a unit basis, but can increase in dollar volume because of new packaging formats or materials costs. Generally, packaging is resistant to economic downturns, and also, does not change much with upturns. So through this sluggish period, packaging volume should be okay; whether or not packaging companies make money may be a different matter.
Q. Do you have the Commercial Print forecast broken down by specific element?
Q. Is there a breakdown of market and product or process (sheetfed, web, digital, etc.) for the increases and decreases in volume between 2008 and 2007?
A. Not in significant detail at this time. We're working on some new market estimation and forecasting models to provide this regularly. We do have historical data for this, and we'll make that an audio chart as soon as some new data become available later this Spring.
Q. Do you think the reduction in printing production employment is due to consolidation versus reduction in print?
A. Consolidation's downward employment effect is mainly on the number of non-production employees, that is, administration and sales. The number of production employees is a better indicator of print volume, regardless of the number of companies, and changes less as a result of consolidation. For a while, ending early last year, the number of production employees was declining at a much lesser rate than non-production workers. Now, both are declining again. We'll make this a chart of the week as well, so look for it sometime in April.
Q. In your view, what will be the key factors that will play on the strength of the dollar, and where do you see it going?
A. Supply and demand, of course. The size of the money supply in relation to the supply of other currencies is what determines it, in conjunction with the demand for dollars.
Inflation is when the supply of dollars outstrips the available goods and services. Excess dollars can be absorbed by productivity and investment. This is why low tax rates cause upturns with low inflation, and why there can be things like stagflation. That should be our greatest economic fear, outside of protectionism.
The Fed will at some point decide that it has created enough dollars to inflate the banking system to supposed health, and then start raising rates again. The earliest that will happen is late 2008, but it is more likely to occur sometime in 2009.
Q. We have been notified of paper increases lately. Recycled papers are going up 30%. How will that affect the demand for environmentally friendly print? Seems to go against the grain, since everyone is talking green but not wanting to pay more.
A. That's not the issue: they shouldn't have to be paying more, and in the long run, they won't.
The paper industry has been a real disappointment. They are still saddled with huge fixed costs, some of which are unproductive, having not taken seriously the effects of computing, desktop publishing, the Internet, and other factors. These are almost by necessity large companies, often burdened by a quarter-to-quarter mindset to please Wall Street analysts. Cathie Black, CEO of Hearst Magazines, has said that the paper industry has a “foot on our throat.”
The paper industry as a whole has had unfortunately weak responses to the nearly 40-year-old environmental movement, letting activists hold sway in the consumer media. The public is unaware of the industry's economic self-interest in the necessity of using forest management techniques, aggressive replanting programs, and maintaining the health of forestlands, to stay in business. It's as if the public doesn't know that trees are renewable crops. I'm sure if someone ran a public opinion poll, a large percentage of the public would assume that paper companies literally cut and run, leaving mountainsides and forests bare as they move to the next area. The industry is paying for its various financial and marketing sins now, and it will take time for it to get into some congruence with market realities. How about “sponsoring” green recycle bins as a paper industry promotional effort? I'm sure towns across the country would be quite interested... perhaps in conjunction with some environmental organizations?
Why won't recycled papers be able to hold higher prices in the long run? Because the desire for “green” printing will continue to grow. If a job can't be printed in that manner at a client-acceptable cost, it may not be printed at all. Yes, the trend toward “green” printing may actually become that strong over the next decade. The inability to provide it at an acceptable market price may be a factor that decreases industry volume yet further.
Q. Can you give us any correlations for the economy to the commercial print industry? At what point did the value of shipments decouple from GDP and where can we go to see the data?
A. You can see the percentage relationship of commercial printing and GDP in our Audio Chart of the Week of September 17, 2007. In general, the significant break between GDP and printing happened in the late 1990s, around 1998. I have written about this in these previous columns on August 6, 2007, and on March 5, 2007.