Is Hewlett Packard's (HPQ) Ink Jet Business in Trouble?

Implications: The Portland (OR) Oregonian featured a lengthy piece concerning layoff rumblings around HP's Corvallis and Vancouver inkjet-printer-related divisions, including quotes from an HP Vice President and his concern for future growth (or lack thereof) in the inkjet business. The news trickle made it to Boise, where much of HP's LaserJet business is centered, with speculation (Idaho Statesman: "Will Boise be hit by more Hewlett-Packard layoffs?") on whether or not down-sizing will make it east of the Cascade Mountains, from Oregon and Washington to Idaho. And then The Oregonian is back with a impressively cogent editorial today, "Shifting Winds in Corvallis", noting the 24-year run of HP's successful inkjet business and the beginnings of a shift away from the industry's razor-and-blades as a business model, and speculating what the future holds for the largest private employer in the Corvallis OR area. Does this signal a fundamental breakage in HP's business model? 

Analysis: There are several key implications for investors in the hardcopy companies such as HP (HPQ), Eastman Kodak (EK), Lexmark (LXK), Epson, and Canon(CAJ). 

First, this could signal trouble for companies such as Epson and Lexmark who rely upon the ink jet market for a large portion of their revenues?  If HP, with all of their economies of scale and their scalable ink jet technology, cannot grow this business, then the second tier would definitely be in trouble. 

Kodak has staked a significant portion of their ‘growth hopes’ on their fledgling ink jet business.  Already the firm has found the higher priced hardware / lower priced supplies model is broken and they have had to respond with lower hardware pricing.  Could this be the final blow for an already struggling business?

Lexmark’s model has been struggling for several years.  According to our detailed financial model for Lexmark, this business has driven as much as $400M in hardware losses annually into Lexmark’s profit and loss sheet.  Does this provide further impetus to either sell or shutter the unprofitable ink jet business?

Secondly, this could indicate a basic 'break' in the ink jet business model.  As the price of color lasers declines (Samsung had a model in Office Depot last Christmas for $99), will color laser become the model of choice for the consumer - replacing ink jet? 

We believe there are segments of the hardcopy industry which continue to be incredibly profitable and vibrant.  The question is whether this segment of the industry has reached a stage of maturity and saturation which will represent a continual drag on profitability for those firms who insist on keeping a position in the market?  In either case this segment of the market will bear close scrutiny over the coming months and years.

This also reinforces the Photizo Group position that the industry business model is fundamentally changing to include a services component as opposed to just the traditional razor blades model.