The imaging supplies marketplace continues to enjoy rapid marketplace expansion, although that expansion may not be occurring at the same rate—or in the same channels—as it historically has occurred. This has led to industry and company anxiety that can be best characterized as industry growing pains.

In addition to changing marketplace topography, there is an unprecedented amount of litigation in the industry, pressure from low-cost labor sources or countries and ingenious competitive activity from the OEMs. The average imaging supplies dealer may feel like he is juggling Jell-O.

The Landscape of Change
The imaging marketplace is big business. According to Lyra Research, Inc., printer hardware and supplies account for $100 billion globally. Since the OEMs follow their razor-and-blade marketing model, imaging supplies long ago surpassed hardware in annual sales. Imaging supplies account for $60 billion, while $40 billion is generated from printers.

The North American marketplace garners about 30 percent of the world’s imaging supplies business, or roughly $20 billion dollars, while the rest of the world marketplace accounts for $40 billion. Of the $20 billion in supplies consumed in North America, roughly one-half each is sold in ink and toner supplies. The aftermarket enjoys a 15-percent share of the former and a 30-percent share of the latter, for a total aftermarket marketplace of $4.5 billion.

In spite of the promise of global transition to color, Lyra forecasts that monochrome toner shipments will continue to grow consistently through 2006, with the world’s usage approaching 250 million units. The aftermarket’s share will grow in total units as well, and penetration on a unit basis is well over 30 percent. North America can expect to consume up to 75 million of these cartridges.
While Lyra forecasts healthy single-digit growth for monochrome laser units, it expects double-digit growth for inkjet supplies as it approaches 800 million units for shipment in 2006. North America’s aftermarket can be expected to provide roughly 240 million units.

Using Lyra’s ratios, the aftermarket can expect to account for the sale of at least 25 million toner cartridges and 36 million inkjet cartridges as we approach 2006. That is a robust marketplace, but one that is bustling with change.

Hot Market, Fierce Competition
Once the purview of local remanufacturers and resellers, the imaging supplies aftermarket has drawn the interest of large channel retailers. The office supplies channel has begun retailing aftermarket cartridges in a big way, particularly as their private-label brands. You cannot walk into a Staples, Office Max or Office Depot without careening headlong into these cartridges. They have moved them to the front of the stores with premier shelf placement, because the aftermarket cartridges provide the consumer with a better deal and the superstore with a larger profit margin.

The office supplies channel is a $500 million dollar opportunity for imaging supplies dealers, and that market has been penetrated only in the past few years. This incredibly lucrative marketplace also includes the large catalog and Internet retailers. Now the electronics marketplace, with stores like Best Buy and CompUSA, are also seeing the opportunity in aftermarket supplies.
While the expansion of the industry into these channels has been a boon for a handful of remanufacturing-based companies, it has resulted in a competitive drain for a host of others. Large remanufacturers have become much larger because of winning such accounts, but opportunities for mid-sized and even small remanufacturers do exist. There are a number of VARs (value-added resellers) in both channels still unaware of the potential of a partnership.

This trend can only continue as remanufactured products find shelf space in supermarkets and other super channels in response to the increasing thirst of consumers for ink and toner. Opportunities also will continue to abound, and competition will continue to escalate in ferocity.

The Sky’s the Limit for Large Remanufacturers
As they have mined the gold in these channels, some remanufacturers have become mega-remanufacturers through growth and acquisition. Some of the acquisitions, such as Clover Technologies’ acquisition of Dataproducts and Adsero’s pending acquisition of Turbon, have created mega-capacity remanufacturers. Companies like these and MSE and GRC have reached production levels of more than 100,000 cartridges per month. And the top few in this category can or soon will be able to build more than 300,000 cartridges per month.

This means that the top 10 players are accounting for more than one million cartridges per month, or roughly one-third of the entire industry’s production. These companies have brought remanufacturing into the mainstream and have caught the eye of investors as well. Several companies have gone public or have been acquired as the industry and its reputation evolves from cottage to corporate.

The Rise of Outsourcing
Another factor in this expansion is the OEMs’ recent trend toward releasing many printers in rapid succession. As individuals, we cannot be all things to all people and, in the same way, a single remanufacturing company no longer can produce all cartridges for all printers. Most remanufacturers have responded by sourcing some of their cartridges from other larger or model-specific remanufacturers.
The “outsourcing” phenomenon—along with the rise of the large remanufacturers—has changed the face of the industry in many ways. Given the lucrative environment of the industry, more component suppliers have arrived on the scene to fill the needs of the market. Where there were chiefly three OPC suppliers, there are now a dozen. And these companies have engaged fiercely in a price war to win the loyalty of key customers. This has squeezed the components distribution channel.

The Much-ballyhooed Convergence
The convergence of copier and printer technologies has arrived. The new MFPs released by Ricoh, Toshiba and their ilk look a lot like multi-featured printers. And the copier marketplace is looking less like the OEM love fest it used to be and more like the printer industry. The copier OEMs are buying up their independent resellers and putting their names on the companies. Those that remain independent are fighting for their place in the market. And all of these companies are eyeing the printer marketplace for future growth. Toshiba’s “end the stealing” advertising campaign is aimed at demonstrating how printers are “stealing” from the end user because of their high cost per page.
The printer marketplace took pages away from the analog copier industry, but that will not remain the status quo as copiers turn digital and add multiple features. Aftermarket dealers offer a unique value proposition with their lower cost per page, and the window of opportunity is wide open.

Lots of New Printers
The OEMs’ razor-and-blade marketing strategy has allowed them to enjoy healthy returns on their supplies business after the initial investment in producing low-margin printers. According to Lyra, Canon, Hewlett-Packard (HP) and Lexmark all enjoy gross profit margins of from 45 to 60 percent on their supplies sales. Those dollars are essential to buttress the lower margins gleaned from printer sales. The OEMs will be loathe to cut those margins as long as they account for such substantial revenue. And they will do everything in their power to keep competitors from luring away supplies sales—a marketplace of $60 billion.
The chief OEM strategy from 2002 to 2004 was the release of dozens of printers, each with its own unique cartridge. The proliferation of printers slows down the aftermarket’s ability to respond to new releases and has helped to create the outsourcing phenomenon as the industry tries to adapt. It also has created other industry anomalies.

Printers that cost less than $500 are disposable, and the OEMs want them disposed of so that a new printer will be purchased—along with the more expensive cartridges it requires. This means that printer service, long a staple of the imaging supplies dealer’s offering, has been adversely affected.
“Clients are throwing machines away, and they are rejecting repair estimates and professing the intent to buy a new one,” said Kevin Dedmon, general manager of Alpha Laser of Houston, Texas. “These customers are acquisition price driven. They see a $350 repair estimate and the opportunity to buy a new machine for $450.” What do you think they want to do? They want to buy new, of course.
But Dedmon sees the rejection as an opportunity for further customer interaction and education. “If they reject the estimate, you have the chance to educate them. You can show them that the supplies cost always goes up with a new printer. Do the math for them. Demonstrate that they will have a new machine on the network and a new supply item in inventory and no remanufactured alternative yet available. That they may sustain a 60 percent increase in cartridge cost. Then take the page count of the machine they are fixing to kill, and you can argue that they are making a $5,000 mistake.”
Dedmon warns, however, that the opportunity is not available without providing service and a free estimate of printer repair. “You have to get a seat at the table with them, and providing a free estimate gets you a seat at the table. Otherwise, you can’t argue it and can’t stop it.”

The new OEM multi-printer strategy definitely has expanded the marketplace and confounded the aftermarket in its attempt to keep pace. However, it has not come close to slowing it. The program actually has had a silver lining: It has forced overall quality improvement as larger remanufacturers are now producing more cartridges for more companies and those remanufacturers must prove their quality to the many channel players that are buying from them.

High Stakes, Many Battles
As the industry has grown in volume and dollars, it has flown above the OEMs’ radar. There currently are a dozen major aftermarket players within the industry that are in key lawsuits with the OEMs.
After early setbacks, a significant early victory has been scored by Static Control Components (SCC) in its battle with Lexmark. The Sixth Circuit Court of Appeals stripped Lexmark of its advantage—and its injunction against the sale of SCC’s Smartek chips—when it said that the use of the Digital Millennium Copyright Act and copyright laws as a way to thwart competition was inappropriate. One of the judges called Lexmark’s actions monopolistic and warned the OEM not to tweak its efforts and try again.
Lexmark responded by upping the ante. It brought suit against a handful of remanufacturers, claiming violation of the Prebate contractual terms. This is an interesting ploy given the seven years of open remanufacturing of Lexmark Prebate products that has taken place since the program’s introduction. However, the seemingly arbitrary selection of defendants has a chilling effect on other aftermarket players.
Hewlett-Packard and Epson have brought lawsuits against aftermarket competitors in the inkjet arena, raising patent infringement as the key issue. Epson won its case against Multi-Union when the judge found that Epson’s patents covering dot matrix technology extended to inkjet. And HP’s recent cases seek to protect their patented ink.
With patents covering personal printer technologies numbering in the tens of thousands, intellectual property issues are at the front line of the industry’s litigation battlegrounds. While many patents cover truly unique and proprietary inventions researched and developed by the OEMs, some are for products or processes that are obvious or for which plenty of “prior art” (historical use) exists. The latest inkjet cases provide some discouraging precedents in this area.
The U.S. Patent Office is overloaded and overworked, and patent applications are approved in spite of these defects. Recently, for example, Kodak filed an application for a patent covering the “method of providing inkjet cartridge refill services.”
Arguments extend outside the industry. The OEMs and aftermarket have moved their fight beyond the courtrooms and into the court of public opinion. In the past year, Hewlett-Packard has commissioned several studies to demonstrate the superior cost-per-page performance of new cartridges and their superior environmental impact. All of these studies contain serious flaws and assumptions that make them easy to discredit for the educated, but persuasive to the casual consumer. This is evidence that the OEMs are undertaking a desperate effort to stem the tide of remanufacturing acceptance.

Education, Action and Quality at the Forefront
However, the OEMs’ efforts do not go unchallenged. High-visibility customers have been singing the praises of remanufactured products, including state purchasing agents from Texas and Massachusetts. And they have been instrumental in helping to discredit some of the flawed propaganda published by the OEMs.

In the past year, the efforts of the International Imaging Technology Council’s (Int’l ITC) lobbyists have led to significant forward motion in key states and at the federal level. New York Assemblyman Joseph Morelle was easily encouraged to pursue the lack of implementation of New York remanufacturing laws. When his investigation turned up practices undertaken by the New York State Office of General Services (OGS) that ran contrary to the law’s intent, he held a public hearing on the matter in December 2004. The answers demonstrated that OGS, the state’s key purchasing agency, seemingly had bent the rules to award Lexmark a lucrative printer contract to the detriment of New York taxpayers. Morelle has asked the Comptroller’s office to carry the investigation further and hopes to call the entire contract into question.

Remanufacturing-resistant customers still point to quality as the chief reason for an OEM purchase. The Standardized Test Methods Committee (STMC) and RIT’s NC3R Imaging Products Lab are determined to arm remanufacturers with testing solutions that give remanufacturers credible information about product performance. The SMTC certification program arose from those efforts.
Katun and other large players in the aftermarket have sought to incorporate the testing protocols into their processes, as remanufacturers large and small have also embraced the methods and sought certification. Companies in China, Australia and South America have been trained. According to STMC Chairman Lester Cornelius, “Remanufacturers in all regions and at all levels of development are seeing the importance of the certification. The only country that doesn’t have a certified dealer might be Iceland.”

Inkjet cartridge certification will be following swiftly as the STMC inkjet committee tackles the same problems that confronted the toner cartridge committee. Ink stability and cartridge performance are high on the priority list as the committee prepares for its second official meeting.

In response, ISO 19752 was developed by a group of OEMs. The new ISO standard is a desperate attempt to stem growing acceptance of STMC standards. And HP now includes performance characteristics using the ISO test methods on its specification materials.

However, the ISO standard is flawed in several ways. The most obvious flaw is that the test method does not specify the amount of page coverage that the testing body must use. Without uniform page coverage, comparisons cannot be made between printers and cartridges. It would be like trying to determine a car’s fuel consumption using the miles-per-gallon calculation, but not specifying what speed the car must maintain.

RIT’s audit program will become part of a larger and more advanced audit program that will lift remanufactured products to a higher degree of acceptability. This will allow the industry to break the 30-percent market share bubble.

Peering into the Future
So what are the predictions for the upcoming year and beyond? Inkjet cartridge prices will drop. Consumers are angry at the high cost of ink and cartridges and are becoming smarter about total cost of ownership. A price drop is a mixed blessing—good for consumers, but aftermarket margins get squeezed.
The multiple printer releases will slow. The printer breeding program will become unsustainable because it is not cost effective for the OEMs any more than it is cost effective for the aftermarket. And customers simply do not like it either. Replacing printers every couple of years when a printer’s capabilities are not exhausted is like throwing away money. And aftermarket printer programs, such as the printer management program offered by Multi-Laser, will expose this. More and improved versions of such aftermarket software will end the debate forever over cost effectiveness of supplies and printer replacement.

The current OEMs will not be alone in the printer marketplace. New entries will show up for a host of reasons. Just recently, BenQ, a company that used to manufacture for Lexmark, announced that it will be releasing its own line of printers in China. And the aftermarket may even find itself working to introduce a remanufacturing-friendly hardware option.

The aftermarket will join together to counter the OEMs’ argument that their products are better for the environment because they recycle cartridges at end of life. The aftermarket will seek and implement more end-of-life recycling programs, such as Australia’s corporate recycling program. Watch for leadership out of Australia and from companies like Adsero. And RIT will be assisting in any efforts that improve the quality of industry sustainability and will be at the forefront of more intelligent, qualified reuse programs for cartridges and components.

Certifications like STMC not only will grow in importance, but they will be improved upon. “It is time to take the certification to the next level,” Cornelius said. “Certification will be based upon actual performance of the company’s product, not just a demonstrated command of the test methods.”

The Form-changing, Expanding Bubble
When an 800-pound gorilla jumps around a room, things break. That is the unintended consequence of having him around. But the imaging supplies industry has become a sort of tough-skinned balloon. The gorilla can punch it on one side, but the balloon still does not break; it just changes its form to adapt.
With roughly 3 percent of the average company’s operating costs going to toner and ink products, there is more business available but more customer knowledge that goes with it. The OEMs will continue to throw punches at the aftermarket, but as it has done historically, the aftermarket industry will conform to the shape it needs to in order to continue its upward expansion. The strong and adaptable, as has been the case since the beginning of time, will survive and thrive
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Author’s note: The author wishes to thank Martin Stein, Yvon Leveille, Kevin Dedmon and Lester Cornelius for their suggestions and contributions.