Andy Lippman Industry Analyst, Ink Jet Consumables Lyra Research

1
Overview of the Ink Jet Supplies Market

• Andy LippmanIndustry Analyst, Ink Jet
  ConsumablesLyra Research

2
Desktop Ink JetCartridge Market
3
Desktop OEM SuppliesIn Their Words

• HP 2006 Annual Report
• Even if HP is able to maintain or increase
  market share for a particular ink jet product,
  revenue could decline because the ink jet
  product is in a maturing industry.
• Revenue and margins also could decline due to
  increased competition from the aftermarket.
  Companies have developed and marketed new
  compatible cartridges for HPs products,
  particularly in jurisdictions where adequate IP
  protection may not exist.
• Canon 2007 Annual Report
• Despite a decline in demand for single-function
  ink jet models and severe price competition in
  the market, sales in value terms increased along
  with unit sales.

4
Desktop OEM Supplies In Their Words

• Lexmark 2006 Annual Report
• Lexmark expects that as it competes with larger
  competitors, the Companys increased market
  presence may attract more frequent challenge,
  both legal and commercial.
• Lexmark sees the possibility that new entrants
  into the market could also impact the Companys
  growth and market share.
• As the installed base of laser and ink jet
  products grows and matures, the Company expects
  competitive supplies activity to increase.
• Epson 2007 Annual Report
• With the exception of Asia, sales volumes of ink
  jet printers in FY 2006 were down in all
  regions. The market situation remained severe as
  competitors claimed market share by launching new
  low-priced models and rolled out aggressive sales
  campaigns.
• In FY 2006, we strategically reduced the
  number of ink jet printers sold, mostly cutting
  models that generate low print volume.

5
Installed Base by Vendor

• Canon brand and technology have advantage
• Dell and Lexmark to focus on higher-margin
  products
• Epson to phase out
• most low-end
• products
• Other Vendors,
• including Kodak, to
• capture 2 percent
• share
• HP also to gain share
• with broad portfolio
• and regional presence

6
OEM Cartridge Shipments by Vendor

• Healthy OEM volume growth due to
• Modest growth in pages
• Lower average
• cartridge page yield
• Shift to fixed print
• head and
• single-color
• cartridges
• Canon to surpass
• Epson in cartridges
• Kodak and others to
• gain share at Lexmarks
• expense

7
Average OEM Cartridge Price

• OEM cartridge price-points continue to fall (does
  not necessarily cause lower cost-per-page)
• Most vendors now offer
• low-price, low-yield
• cartridges
• Canon is only the
  company with
  increasing
• average prices
• Cartridge prices
• expected to stabilize
• beyond 2010

8
OEM Cartridge Revenue by Vendor

• Canon and HP forecasted to capture most of
  revenue growth
• Dell and Lexmark
• expected to
• have shrinking
• revenues
• Epson to place more
• focus on other
• ink jet segments

9
Cartridge Shipments by Source

• OEMs to gain 2 percent market share versus
  third-party and counterfeit sources
• Patent litigation
• Cartridge chip security
• Anti-aftermarket
• marketing efforts
• OEM cartridge
• return programs
• Lower cartridge
• price-points

10
HP Ink Cartridge Price TrendsNorth America

• HP standard cartridge prices have fallen
  through new product introductions
• HPs response to
• Consumer behavior
• Improved manufacturing
• costs
• Aftermarket pricing
• pressure

11
Epson TimelineIntellectual Property Protection
12
Aftermarket Cartridge Shipments by Region

• Intellectual property protection and OEM market
  power to constrain aftermarket vendors in North
  America and EMEA
• Asia Pacific and Latin
• American aftermarket
• growth
• High price
  sensitivity
• Limited patent
• enforcement
• Fragmented
  supply chain

13
Ink Cartridge SKU Fragmentation

• Aftermarket must keep pace with SKU fragmentation
• More OEM products on shelves (i.e., Dell and
  Kodak)
• Standard (low) and high-capacity options
• Regionalization of cartridges (e.g., four HP
  zones)
• Multiple updates to QA/security chips
• North American example
• 58 SKUs accounted for 80 percent
• of demand in 2006
• In 2005, top 80 percent included
• 43 SKUs
• Increasing empties prices (scarcity)
• may severely reduce margins
• for cartridge remanufacturers

Zone 1
Zone 2
Zone 4
Zone 3
14
Cartridge Revenue by Source

• Overall revenue growth expected to slow
• OEMs to gain 2 percent revenue market share
• Aftermarket revenue to
• be flat through 2011
• Refill kit and refill
• service segment to
• expand about 100
• million

15
Desktop Ink JetBulk Ink Market
16
Average Ink Volume per Cartridge

• Total desktop ink demand has been adversely
  impacted by greater ink jet platform efficiencies
• Print head, driver, ink, and media technology
  improvements lower
  ink volume per page
• Result average
  ink volume per
  
  cartridge is falling

17
Desktop Ink Shipments by Source

• Total desktop ink shipments expected to be flat
  due to increased printer system efficiencies
• Aftermarket ink volumes to shrink due to OEM
  competition

18
Desktop Ink Shipments by Type

• Desktop ink volumes to shift towards
  pigment-based formulations
• Drivers include
• Pigment dispersion
• advancements
• Aftermarket using
• pigmented black
• Decreasing demand
• for legacy dye-based
• SKUs
• Growing prevalence
• of color pigment ink

19
Ink Jet Media Market
20
Coated Laser Media

• Monochrome laser quickly replaced with color
  laser tech
• Color laser print quality improvingchemical
  toner
• HP is leading the retail push for coated EP
  papers
• Heavyweight coated laser papers are becoming
  competitive with coated ink jet papers,
  particularly on price

21
Desktop Media Volumesby Imaging Technology

• Desktop color laser is capturing some pages from
  monochrome laser and ink jet devices
• In 2008, more pages to go through
• desktop color laser than through the entire ink
  jet segment

22
Revenue for Coated IJ and EP Paper

• Digital color production and in-house marketing
  is increasing the demand for color
  electrophotographic media
• Coated ink jet paper
• revenue is declining
• due to slowing
• volume growth and
• decreasing prices

23
Ink Jet in the Office
24
Home Photography as an Ink Jet Driver

• Home photo prints eclipsed by retail, online
  photo printing
• Ink jet vendors must look for other opportunities

25
Ink Jet Looks Outside of the Home

• Home printing accounts for less than 5 percent of
  digitally printed pages

26
Demands of an Office Ink Jet Printer

• Basics of office hardware
• High print speed (in laser terms)
• Durable print engine (robust duty cycle)
• Reliable paper feed (large print jobs)
• Networking capability (sharing among computers)
• High-capacity paper tray (few interventions)
• Basics of office inks
• Laser quality output (bold, high-durability
  inks)
• Low intervention rate (high-yield cartridges)
• Low total cost of ownership(low-price inks)

27
Office Ink Jet Products of Today

• Latest examples of office ink jet printers
• Canon Pixma MX700
• Epson Stylus C120
• HP Officejet Pro K5400, Edgeline CM8060/8050 MFP
• Lexmark X7550
• Ricoh Gelsprinter Aficio GX5050N, Aficio 615C
• Xerox Phaser 8560, Phaser 8860
• Latest examples of office ink jet inks
• Epson DuraBrite Ultra
• Kodak Kodacolor Inks
• HP Vivera Office, HP Edgeline Inks
• Lexmark Evercolor 2
• Ricoh GelJet Viscous Ink
• Xerox Solid Ink

28
Ink Jet vs. Laser Advantages

• Todays office ink jet products
• Higher print resolution
• Simpler print engine assembly
• Greater media flexibility
• More power-efficient
• Lower total cost of operation
  (in some cases)
• Tomorrows office ink jet products
• Higher print-speedhardware-cost ratio
• Fewer consumables, easier maintenance
• Greater product versatility
• More environmentally friendly
• Much lower total cost of operation

29
Color Printing Costs SOHO
30
Color Printing Costs SOHO
31
Color Printing Costs SOHO
32
Color Printing Costs SMB
33
Color Printing Costs SMB
34
Color Printing Costs SMB
35
Ink Jet Faces Tough Competition
36
Differentiating Color Printer Vendors

• Beyond technology, OEMs will be distinguished by
• Product designeasy to use and look at
• Channel partnersreach, integrate, and support
• Marketing powereducate, demonstrate, and
  influence
• Green business modelreduce e-waste
• Profitabilitybalance hardware and
  supplies margins
• Driving office ink jet will require
• End-user acceptance and experience
• Greater in-house color printing
• New business modelsa rethinking of
  razor and blades

37
Laser Wins in the Near Term

• Laser marking revenue projected to expand 60
  percent between 2006 and 2011 versus 6 percent
  for ink jet

38
What if Ink Jet Wins in the Long-Term?
39
Thank You