Commentary & Analysis
June 10 Economic Webinar Q&A
June 10 Economic Webinar Q&
By Dr. Joe Webb
Published: June 15, 2009
June 10 Economic Webinar Q&A
Q. We have been on the watch for stagflation or strong inflation, and data is inconclusive. What is your read of the indicators?
A. We already have stagflation. Unemployment is rising, GDP for the second quarter will probably be negative (3 in a row) and inflation compared to December 2008 is up at a rate more than 4% (the past ten years it has averaged about 2.5%). Commodity prices are up, too. I think that's stagflation. No one of prominence is calling it that yet.
Q. Is the average size of successful printing companies increasing or decreasing? Sales volume and or employee count as a measure.
A. Sales are down and our industry has a habit of calibrating itself by adding or shedding businesses as needed. The inflation-adjusted sales per employee is actually remarkably steady, which indicates this. The average size of a commercial printing business has been on a very slow decline for decades. It was around 26 employees in the late 1980s and was just above 19 by 2006. That says more about desktop publishing replacing prepress than it says about anything else.
Q. Even though imports and exports have dropped, it would appear the trade gap has shrunk considerably. How has that helped/hurt the economy as a whole?
A. Sorry, a big trade gap is a sign of economic health, as paradoxical as it sounds. (Most people don't realize we had trade surpluses during the Depression). We need imported materials because they are used in other manufacturing here. One of the best descriptions of the process is an article that originally appeared in the Wall Street Journal titled "We Think, They Sweat," about the value chain of an Apple iPod. Without imports, those North Dakota bananas and Wisconsin coffee beans would be all we had.
Q. Many of the indicators you've shared seem to show we are still on a downward trend yet the feeling in our community is that things have leveled off or are getting better... is this a false feeling based on the fact that we're just plain numb and no longer receptive to negative information (we've turned off CNN)?
A. There is such a desire to be out of this funk that I can understand why people want it to be over. We must keep in mind that all data are historical. There are no truly reliable forward-looking indicators. There are lots of red flags that bring potential problems to attention, but even they can give false indicators. Employment data lags the economy by at least six months. The stock market is considered an indicator of future growth, but we have to remember it's an indication of expected growth or outcomes for a future time, so even that's not all that reliable. This frustration with economic data in planning is what got me more deeply interested in economics. The area of economics that I have found most interesting and most explanatory of what happens is "the Austrian school." The work of this group of economists is not commonly taught in colleges (which are overwhelmingly Keynesian) so it makes it all the more fascinating, like someone made it forbidden to read. For basic economics, there is only one book a newcomer should read, and that's Dr. Thomas Sowell's Basic Economics. As far as the Austrian school, the Mises Institute is the keeper of that flame.
Q. Do you see the label/packaging segment shipments showing positive growth through the end of 2009?
A. Packaging is not a bright spot in the business right now, but it's the closest we have to one on a long term basis. I did see some articles in Advertising Age recently that show some interest among consumer package goods companies in reinvigorating brands with redesigns and new campaigns. We'll see. Underlying the packaging industry is the fact that population is still growing, life expectancies are still increasing, and the pace of life is such that more and more prepared foods and products are used over time.
Q. I feel like about 30% of my prospects (commercial printers - I sell digital production equipment) are out of business... Is it fair to say that if they're in business today, they've made it through the tough times? Is it better for the ones that are left - that they'll have less competition when things pick up?
A. You sound like you sell in the Northeast! There will always be tough times where companies exceed the performance of their competitors. There are printing companies that go out of business even in good times. One would hope that if someone has gotten through the past three years that they have a knack and skill for survival. As for less competition, it's more that little outside capital is coming into the industry, so the competitors you know today will be more likely to be the competitors you have in the near future.
Q. How does an "investor" profit from rising inflation? What investment vehicle?
A. I am not an investment counselor. Gold is traditional, of course, but nearly all commodities would be a common recommendation. Others prefer investing in the companies involved in mining or growing the commodities. Assuming that interest rates will rise in response to inflation, there are some new exchange-traded funds that short-sell U.S. Treasury bonds (and other bonds for that matter) since bond prices would go down in such a scenario. A quick lookup at etfconnect.com or a search for articles like this one and this one can shed some light on the subject.
Q. What are the implications for plates? Any hope for new niche products, etc. to offset declines?
A. As long as there's offset there will be plates. Pretty trite, huh? I'm not sure what to say. It's not a growing future, but it can still be profitable, especially when they offer benefits such as environmental advantage, less processing cost, reduced startup waste, and numerous other characteristics. Just talking about plates makes me realize how much I miss film and phototypesetting paper. An important technology in relation to the future of plate consumption is the HP ink jet web press. The more that digital printing can reduce its own costs and increase its format size, the greater the threat to plate consumption.
Q. How do you think this economy will affect the major printer suppliers? (i.e., Xerox, IBM, Océ, Kodak)
A. I don't follow these companies as stocks or anything like that, but I can make some general comments. Many of these companies relied on the banking, finance, investment, and insurance industries, and we know that those businesses will not back to historical courses of spending for a while. Some are closely tied to IT spending, and from what I have been able to detect, those budgets may actually be doing okay because top management still feels that information infrastructure has a demonstrable payback of lower costs. Any of the companies having financial difficulties may have problems or be more cautious than usual in lending to printers (hard to believe, huh?).
Q. Should printers invest in technology that will create efficiency throughout the shop?
A. It's hard to make a case for not investing. The industry often has very efficient press and production floors but with serious problems outside of that. One way to look at it is that they're really great in the costs of goods sold items on their income statement, but when it comes to sales and administrative, it's another world. Technology can be put into costs of goods sold, and the only approach to sales and administrative is austerity, it seems. A reason for this is that technology investment in production is viewed as increasing sales, but technology investment in sales and administrative functions does not create new sales or new markets, so it's not worthwhile. That's really an unfortunate misperception.
Q. What do you see as the growth rate for digital press applications (photo books for example) over the next 3 to 4 years?
A. Sorry, I don't follow this market, but I wonder if there are some problems there right now considering the incredibly aggressive e-mail offers for these products I've been getting lately. It might be that these are discretionary novelty items and they are affected by consumer reluctance to spend on such products at this time.
There is a good and profitable place for these products, but the market is not large.
Q. What effect will these huge mergers and acquisitions have on the industry? Will this ultimately lock in their respective market share in their sweet spots?
A. There's no such thing as a sweet spot in the long term. The market changes too much. There is no such thing as synergies except for a very short window of time. Existing competitors react to changes and there are always new technologies for investment or as new formats with new competitors. I was always fascinated with the "sweet spot" comments over the years, like there was some kind of magic in finding it and that once found it was permanent. I never understood that. Mergers have a very spotty record that is not always so sweet.
Q. What are the most innovative initiatives for medium sized printers? Who is thriving in this economy and what are they doing?
A. The most innovative initiatives have little to do with technologies but with their business approaches. They are very proactive. In the mid-1990s until about five or so years ago, digital printing was a real disaster. Finally, it was realized that the market had to be created with the development of various programs that could be sold to print clients. This was a far cry from the long-embedded sales approach of "here's our equipment list; can we bid on one of your upcoming jobs?" For many of these digital printing businesses, their offset work went up as clients began to view them as set apart from everyone else.
Q. Where is ePaper today and how will this effect eBooks?
A. The technology is coming along and is predominantly black & white. It's found in products like Amazon Kindle, the Sony E-Reader, and others, but also watches, cell phones, and some PDAs. Color is on its way, as are foldable or rollable screens. You'll see these in niche markets first. For now, Kindle is the star, and it had nothing to do with the e-paper technology. It has to do with its connectivity to Amazon's store, much like the iPod set a standard for digital music sales through iTunes.
Q. Dealers Survival: Any comments re: current traditional graphic arts dealers’ health in current supply margin crunch, slowdown and increasing receivable concerns? Any data here re: dealers "shutting their doors"?
A. I grew up in the business when all dealers were local, and if they were really big, they were regional, and privately held. This was a time when there was a very good business to be had in all of the supplies used in prepress. The dealers were also advisors to craftspeople, with many of the dealer personnel also having craft experience. The technology changed, and as it became software and computers, so did the supplies, and so did the characteristics of the distribution channel. The loss of prepress changed our industry in deep and serious ways I have only come to appreciate in recent years. The vibrant dealer community has been replaced by narrow specialists, independent sales representatives, paper merchants that have expanded their offerings, expanded copier and office equipment channels, and a handful (or less) of national dealers. The dealers no longer have an association. Somehow, Mike Fichera keeps the optimism and the enthusiasm going in Dealer Communicator. There are few, if any, data about dealers other than what "O-Mike" maintains.
Q. You spent a lot of time on e-books, but you didn't spend a lot of time on the VDP opportunity? Do you see revenue growth here or is the potential limited?
A. It just so happened we did e-books as a topic this time. We did have some survey data in prior webinars regarding VDP and its penetration. I have heard nothing different than our data which reflects that true high-end color VDP is less than 10% of the market, and that there are only a small number of specialists for whom it is their focus. It takes diligent effort to get new customers with the proper approach and the proper databases to realize the greatest gains from a printer's perspective.
Q. Are you saying that although we are borrowing at lesser rates, it is also going to be part of a long term problem?
A. You're referring to the below-inflation rates currently in effect by the Fed. The problem is that you have an expansion of credit but no expansion of goods. Investment is needed to create goods, and that requires entrepreneurs who detect potential markets for what they do. Right now, the money supply has been expanded to stop falling prices of goods (like houses) that were already made and sold. It's not a good use of capital.
Q. Any thoughts on the impact of some of the major banks paying back their government loans? Will this prove to be good for the taxpayer?
A. Loaning them money was the first mistake. Their taking the money was the second mistake. Someone will "arrange the books" to convince people that it was a good idea, but it was malinvestment that prevented buyers from entering the market and buying those goods and kept the institutions and executives who created the problems generally in charge. The funds were used to support failed businesses which were known and seen, and those funds could not reach new businesses that were yet to be formed. Milton Friedman warned of this often. Everyone can see businesses today, but no one can see businesses yet to be formed. In the end, it will be bad for the taxpayers, who will see higher inflation, low growth because of misdirected investment, and an erosion of savings. The saddest part of inflation is that it distorts history and makes it difficult to discern true financial progress. The next saddest part is that inflation in a progressive tax system reduces the real return to savers as they save more.
Q. Do you see the Espresso (print-on-demand machine) being a player in the print industry?
A. It remains to be seen. We have seen many technologies come and go, of course. We forget that e-books and the Internet compete with on-demand printing. I've reminded people, for example, that digital printing is affected by all of the same forces that offset is, but that there can be a shift between the two processes that gives digital relative growth in a declining business. There have been many kiosk-type approaches for many products over the years. Music stores once had custom cassette makers, where buyers could pick the songs they wanted, and then make a custom cassette with all copyrights and residuals dealt with in a manner transparent to the buyer. It may be one of those things that works well in certain locations or stores for a while, but may not have full market appeal for some time.
Q. When I look at the A23SVS data on the census web site I see seasonally adjusted data that is sometimes different than is what is shown on slide 22. Do you make other adjustments or use the unadjusted data?
A. This is a technical question, folks, so let me give some context. The Department of Commerce issues monthly reports for printing shipments which I and others use in planning, forecasting, and sales management. These data come in two basic varieties, seasonally-adjusted and unadjusted. Seasonal adjustment is an attempt to have periods of time be comparable when they are really not. Remember, when statistics geeks talk about seasonality, they are referring to patterns of fluctuation that are predictable and repeatable. After you adjust for the fluctuation, parts of the series of data would be directly comparable.
I feel that seasonality adjustment is kind of a black box. I would rather take the real data and adjust it myself because I would know exactly what the adjustment is. For this reason, I like comparing one month to that same month in the prior year, one quarter to the same quarter of the prior year, etc. It is also the reason why I use 12-month moving totals (or 4-quarter moving totals) when doing comparisons. It means that you are always looking at an annual figure. This also means that the prime change I make to data is adjusting for inflation. While the data series you see most often in my columns and presentations is that adjusted by the Consumer Price Index, we do adjust data three other ways that we don't regularly publish. To get a sense of how inflation adjustment affects data series, see my column from April 14 of last year. We have released all of our adjusted data in the Historical Printing Shipments report that is available from the WhatTheyThink e-store.
Q. Why do you use Real GDP Y/Y yet you prefer Q/Q for CPI?
A. I always prefer Y/Y comparisons because they eliminate the requirement and the effect of seasonal factors as noted above. For the CPI this year, we have a special case because of last year's bubble. December 2008 vs. December 2007 CPI was up 0.1%, so the year ended flat after quite a roller-coaster ride, peaking in the summer. So there I'm not comparing Q/Q but am annualizing the change since December 2008. The CPI calculation has a seasonal adjustment which makes this possible, but they also publish an unadjusted data series. That shows inflation as generally worse since December. The CPI also includes a moving three-month inflation calculation.
Q. Are there any tools for content creators to CREATE and manage VDP campaigns? (market segmentation, lifestyles etc.)
A. For those factors, it all hinges on the data base that is being used. As far as other tools, I invite "guest answerer" Cary Sherburne to add a comment
Cary: There are a number of solutions designed to allow the content creator to be involved in this process. This list will not be exhaustive, but they include XMPie’s uDirect (which is available in three levels: Classic, Studio, Premium), Printable’s Fusion Pro Web and Fusion Pro Server (plus several add-on modules); Kodak’s Design2Launch, Meadows Publishing Solutions’ DesignMerge, PageFlex Campaign Manager, Saepio—to name a few.
Q. It seems as we shift from offset to digital, we still need content creation. In addition, we need VDP creation for digital and cross-media campaigns. What initiatives, opportunities and/or tools exist for us to encourage content creation?
A. Why do we need VDP for cross-media? Cross-media can include formats like signage, brochures, downloadable PDFs, web sites, e-mail campaigns, and numerous other things.
As far as encouraging content creation, the only thing that limits us is our ability to form ideas.
Q. What is the forecast for heatset web in '09 and '10?
A. Its fortunes are in the magazine, insert, and catalog markets. For years these were profitable and growing print havens. I can only suspect that things will stay tough there.
Q. With the burden of print primarily moving to the consumer...do you see walk-up facilities (e.g. Kinkos, others) and desktop printers and related supplies being the greatest opportunity with this trend?
A. Burden of print? The opportunity has been in the desktop printers of the consumers, but even there, things are slowing. This trend is really mature. Many consumers have stopped printing as they have become used to sharing photos online in various photo sites and also social media sites. E-mail has become more common for consumers to transact information exchanges. Broadband has increased dependence on the Internet for daily household tasks. What has been particularly interesting has been the increase in use in older age groups. Sure, they were 15 years younger when all this stuff started, but today's retirees are far more online savvy as a group than anyone had expected.
For years walk-up print services have tried to grow their businesses by relying less on that format and more on business sales. While a good walk-up business is important, it often involves other non-print services, such as shipping. Those businesses that developed their non-walk-up business made a good choice which gave their businesses more stability than they would have otherwise had if they had remained reliant on consumer walk-up business.