HP is overturning a print sales model that helped it amass billions in profits over the decades but is now challenged by rival supplies makers luring customers with cheaper ink and toner cartridges.
Traditionally, printers were sold at a loss and the profit was generated by consumables over the lifetime of the device, in much the same way as the razor industry operates.
However, during the company's current financial year, the money-spinner stopped spinning (Q1, Q2 and Q3 are here). And HP's incoming printer president, Tuan Tran, told the Securities Analysts Meeting in Palo Alto last week that it needs to redraw the battle lines, in part by trying to "rebalance the system profitability, capturing more profit upfront" from the printer hardware.
He discussed ways HP is attempting to safeguard its supplies revenues by shifting to Smart Tank and Neverstop printers that come fully loaded with an estimated two years' worth of ink or toner.
This is for customers that want to exclusively buy the printer and supplies from HP. "They [customers] will get a model that delivers a more secure, more reliable, higher quality and sustainable print experience," said Tran.
HP did not explain how it will ensure its locked printers only accept its own-branded supplies; supplies cloners and re-manufacturers have reverse-engineered cartridge smart chips for more than a decade.
"Alternatively, customers can pay for the full value of HP printers upfront, gaining the flexibility for supplies," Tran said. "This is like buying an unlocked cellphone, and then choosing your own wireless carrier. In these cases, customers can enjoy HP's superior printing hardware but obviously take risk if they choose alternative supplies."
HP said the risk of cloned or remanufactured supplies is three-fold: environmental, in that 97 per cent of alternative supplies end up in landfills; security, in that hackers can exploit a "vulnerability where the supply chip meets the printer"; and quality and printer performance degradation.
Tran continued to wax lyrical about the upfront model.
"We rebalance the system profitability by monetising our innovation through increased hardware prices. This hardware profit rebalancing is not new for us. We've been doing it for years in China, where half of the mono laser printer comes from HP. Even though China is a super price sensitive market, we are able to command a 50 per cent price premium for hardware alone."
He reminded analysts in attendance, Wall Street types that are responsible for steering market sentiments on HP's shares, that in 1984, the new DeskJet printer HP launched was sold for $1,000, and not subsidised.
"In the years ahead, we want to pivot our business model even further, and ultimately provide customers with two choices at the time of purchase."
Not all of the analysts in attendance were convinced by HP's new thinking. Toni Sacconaghi, tech watcher at Bernstein, applauded HP for "acknowledging the challenges" but claimed the strategy was "fraught with risk".
He suggested rivals may not follow HP, leaving it exposed with uncompetitively priced hardware; that HP's $13bn supplies business may run off faster than it can migrate its current business model; and he claimed it is not clear if HP will be better off financially.
HP has more than 150 million printers installed in the field, and continues to lead the home and office printing market, worth roughly $155bn annually.
The problems with HP's supplies business showed up in Q1 of its current fiscal year, when an inventory bottleneck was spotted as sales dropped. HP initially said it would take the rest of the year to clear the decks. Now it is admitting the classic supplies model is broken.
Tran said HP is continuing to take steps to protect its IP, and has taken down 50,000 online listings that "infringe" its copyright and trademarks. He also said HP is trying to get close to the legion of channel sellers that flog its hardware and supplies to customers through a "centralised pricing process and a disciplined channel partner programme".
This, he claimed, will give HP a "tighter visibility of inventory" and allow the company to "manage it much more robustly". HP is also putting more cash into tools, including analytics, to "help us track, verify cartridges from our factories through our multi-tier distribution channel and to our end customer".
HP is also going to chop up to 9,000 workers by fiscal 2022, mostly in back-office functions, to reduce costs as it navigates this phase in its history.
Tran concluded: "By creating multiple ways for customers to purchase and consume print we can become less reliant on supplies and rebalance toward hardware profitability. We know this transition will take time and could include trade-offs in market share and hardware growth in order to maximise long-term progress but in the end we are going to end up with a more balanced systems model.
"So to that end we will begin to systematically increase hardware prices to move towards this model. As result, supplies, while still very, very, very important to us, will no longer be the single determinant metric for our progress, since supplies alone does not capture the total systems opportunity." ®