Pressure on the Printer Business Cracks HP's Composure

Last Updated May 17, 2010 2:50 PM EDT

Look at HP's (HPQ) business over time and you see why the company wanted to acquire Palm (PALM). Not only is the mobile market exploding, but HP continues to lose ground in an important cash cow: the printer business. Changing market conditions and tough competition have hit the division hard. The tip-off? HP set up a media tour to justify the high cost of its printer ink.

Like many other printer manufacturers, HP has worked on the razor business model. Sell the razor (printer in this case) inexpensively and make money on the consumable blades (ink). HP's spin is that its higher ink prices aren't about profit, but rather, customers getting quality printing. HP wanted to warn against the danger of refilling ink cartridge with Ink That Could Cause Problems.

I've no doubt some companies would blend water with charred horse hair if they thought they could make money off unsuspecting consumers. However, HP's pitch is about one cartridge color: green.

But in the company's last quarterly earnings report, H-P's printing division booked more than $6 billion in sales and more than $1 billion in operating profit. Its operating profit margin was 17%, but Shaw Wu, an analyst with Kaufman Brothers, said that includes sales of low-profit printers. On ink alone, he estimates that H-P's margin is somewhere between 20% and 30%.
Look at a quarter-by-quarter trend of how the printer division has done, both in revenue and in operating profit, that I pulled together from HP financial filings:

Changing times have hit HP hard. Many people increasingly look at documents -- and, more importantly, pictures, as images require gobs of colored inks -- on screens. People don't tend to keep large stacks of 4x6 prints any more, and so there is increasingly less demand for ink.

In addition, people know how expensive ink actually is, and competitors have shifted their marketing strategies. Kodak (EK) has pushed a cost-savings theme and, as a likely result, saw a 27 percent jump in product sales. Similarly, Lexmark (LXK) has emphasized lowering the price of printing.

HP's campaign is a lot like the Wizard of Oz, who tries to keep people from looking at the man behind the curtain. Unfortunately for the company, technology pulled the drapes away some time back.

Image: courtesy HP

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.