November 22, 2004

Printing at Kiosks and Online Trends

IDC predicts 69 percent of printed digital photos will emerge from home printers like H-P's. By 2007, that figure will fall to 42 percent

Like millions of other Americans, Julie Berry got a digital camera this year. What the 35-year-old stay-at-home mom does with the pictures is the subject of the next big battle over the future of photography.
After snapping shots of her 2-year-old daughter, Ginger, Ms. Berry printed them out in her study - and was disappointed. "The photos just didn't have great color or great resolution," she says. "I just thought: 'Oh well, I guess we have to buy a better printer.' "

A few weeks later, Ms. Berry had more luck at the digital printing kiosk at the CVS Corp. pharmacy near her home in Mansfield, Mass. On her first try, Ms. Berry produced 30 digital prints for 29 cents a pop in less than half an hour. Now, she's a convert. "It's easy and it's very reasonably priced," she says, "especially considering I don't want to spend time and money and run out to buy a new printer."

The switch to digital cameras has already brought sweeping change to the $85 billion photography business. Eastman Kodak Co., the big film company, saw its business drop off and is struggling to adjust. Camera makers found a hot new product. Now, the next battlefield is rapidly taking shape: Printer makers like Hewlett-Packard Co. are in a fierce struggle with big retailers like CVS and Wal-Mart Stores Inc. as well as upstart Web sites to capture consumers while their habits for printing digital pictures are still in flux.

The stakes are high for retailers, who have long benefited from the foot traffic and profits generated by the $5.3 billion U.S. film-processing business. Wal-Mart stores brought in a hefty $3.5 billion in revenue from photo processing in the last fiscal year, or 2 percent of store revenue. They are even higher for H-P. While printing accounts for 30 percent of H-P's revenue, it generates 75 percent of the company's profit. H-P has been counting on printing color photos at home to keep the ink flowing for years to come.

For a while, H-P dominated the market. As recently as 2002, 91 percent of digital photos printed in the U.S. were produced on a home or office printer, according to research firm IDC. With more than 40 percent of the consumer inkjet-printer market, H-P was sitting pretty.

Now, the big retailers are rapidly pushing into digital-photo printing, with do-it-yourself kiosks and drop-off centers. They are challenging H-P with TV ads and promotional campaigns attacking the cost and complexity of home printing. A new crop of online photo sites promises consumers professional digital images without leaving home.

While printing at home still typically costs 60 cents for a 4-by-6 image, including the costs of ink and paper, big retailers generally charge below 30 cents and some online sites charge less than 20 cents.

The result: This year, IDC predicts only about 69 percent of printed digital photos will emerge from home printers like H-P's. By 2007, it projects that figure will fall to 42 percent - albeit in a much bigger digital photo market.

Now, H-P is urgently shifting its strategy to recapture Ms. Berry and others like her. When H-P entered the digital-photo business nearly a decade ago, it worried most about matching the quality of film snapshots - developing machines that could create high-quality images, but only slowly and at fairly hefty prices.

Since taking over five years ago, H-P Chief Executive Carly Fiorina has invested more than $1 billion in new digital-photography products, including cameras and portable photo-printers. Today the company is betting that the convenience and instant gratification of home printing will triumph over the hassle of traveling to a store. H-P is aiming to cut in half, to 30 seconds, the time to print a 4-by-6 image. It's testing cheaper paper and ink. And it's trying to simplify the task of printing images directly from camera-cellphones by developing software that easily sends an image to a printer.

"This is absolutely a big bet for us," says Vyomesh "VJ" Joshi, H-P's executive vice president for printing and imaging. "Retailers are usually one of the slower groups to respond, but they suddenly woke up. So we have to get more aggressive."

Two years after H-P completed its $19 billion acquisition of Compaq Computer Corp., the company is struggling to deliver consistent growth. Protecting its printing cash cow is critical to doing that. Analysts estimate that ink cartridges carry a gross profit margin - sales price minus the cost to make the cartridge - of more than 60 percent. That's far higher than the margins on H-P's personal computers, standardized server-computers and other products. H-P sells most of its printers at a loss, planning to make up the difference on ink sales. Photo printing is especially lucrative, because pictures consume 20 times as much ink as printing a page of text. H-P's color inkjet cartridges generally cost between $19 and $35.

Unlike traditional film, which requires consumers to print out a picture before they can see the image, digital cameras allow users to delete an image they don't like and then crop, edit and enhance images they want to keep.

Printing those pictures is a big growth opportunity for H-P, as digital cameras move from high-end gadget to mass phenomenon. Sales of film in the U.S. peaked at $6.2 billion in 2000. Last year, film sales totaled $5.3 billion, down 13 percent. Meanwhile, 66 million digital cameras will be sold this year, up from 12 million in 2000, predicts InfoTrends Research Group Inc.

Others covet those images as well. Online photography sites like Snapfish, the online arm of District Photo Inc., and closely held Shutterfly Inc. will print digital photos for 29 cents or less - under 20 cents for those who prepay - and mail them to customers in a day or two. Yahoo Inc., which started a similar site in 2000, sells prints for 19 cents, and recently offered 100 free prints to new subscribers to its high-speed Internet service.

The biggest challenge comes from large retailers that are offering to usher consumers into this unfamiliar world with a familiar routine: Bring us your digital images, and we'll give you professional-looking finished prints. Even retailers that sell H-P printers, such as Best Buy Co. and CompUSA Inc., are beginning to compete with H-P by offering digital-photo services in their stores.

For retailers, digital printing is a rich new vein. Traditional prints require the extra step of exposing a negative through a chemical process, and retailers can charge only about 15 cents a print because there is still so much competition in the field. Digital prints, which essentially involve only the cost of ink and paper, are currently commanding about 29 cents, meaning gross margins are higher.

In pitching their services, retailers focus on price and simplicity. Walgreen Co. proclaims on posters in its stores that its 29-cent prints are cheaper than home printing. CVS runs TV and print ads showing digital photos being printed while consumers shop for other items. Wal-Mart sells H-P printers but increasingly emphasizes its own digital-photo service, at 24 cents a print. By the end of the year, Wal-Mart expects to offer digital-photo processing in more than 3,000 of its more than 3,600 stores and wholesale clubs.

The roots of this clash stretch back to the mid-1990s, when film still ruled the day. In 1995, 640 million rolls of film were sold in the U.S., for $4.9 billion. Consumers' habits were entrenched: They snapped photos, took the film to a nearby store and got prints. Digital cameras were still expensive - $650 and up - and couldn't produce detailed images.

But H-P looked ahead and saw that affordable digital cameras would soon produce high-quality images. Hoping to expand the use of its consumer printers and to sell more ink, H-P in 1995 began building specialized photo printers. The company concentrated on making these printers work well with high-quality inks and paper so that home-printed digital images would retain the gloss of traditional film prints.

H-P's future competitors also calculated ahead. Makers of film-processing equipment for big retailers like Wal-Mart and Costco Wholesale Corp. began to go digital. In 1996, Fuji Photo Film Co. released a digital lab for retailers. Noritsu America Corp. followed in 1999. "We were betting the mass audience would return to its old photofinishing habits," says Paul D'Andrea, a Fuji senior vice president.

Kodak, meanwhile, is trying to play it all ways in the digital photography world. As it shifts away from its traditional film business, the company is developing photo printers and digital cameras of its own. It has also put a stake in the online digital image market with its popular Ofoto Web site, which charges 29 cents per print. Kodak also sells do-it-yourself digital printing kiosks and other photofinishing equipment to retailers.

In 2000, Wal-Mart executives studying camera sales realized consumers were switching to digital cameras more quickly than they had projected. So in 2001, Wal-Mart began converting its photo services to digital-photo equipment. The retail giant stressed convenience, allowing customers to drop off digital-camera memory cards and return for finished prints, just as they had done with traditional film. It has also created an online service that mails prints to users, or allows them to come to the store to pick the photos up. "We want to make digital-photo printing as easy as going to an ATM," says Dave Rogers, Wal-Mart's vice president of photo centers.

The traditional film developers also attacked home printing on price. In 2001, Costco started offering digital prints for 19 cents each. The next year, Wal-Mart cut its standard price to 24 cents, from 29 cents. "If you really understand what it costs to print photos at home, plus all the extra time involved, then people will see it's a good deal to print in stores instead," says Mr. Rogers.

The price cuts triggered alarm bells at H-P, which until then hadn't needed to worry much about the minimal competition. At the time, H-P estimated that home prints cost roughly 60 cents each, including the price of ink and paper. Consumer focus groups revealed another problem: Home printing was slow, consuming 60 to 65 seconds to print a 4-by-6 image, compared with as little as six seconds at some retail photo kiosks.

So H-P shifted to making home printing easier. In 2002, H-P introduced printers with slots for the memory cards that store images in a digital camera, eliminating the need to transfer photos to a computer before printing. In a speech that year, Ms. Fiorina said that H-P had streamlined the process for capturing, storing, sharing and printing images to three steps, down from 57.

In 2003, HP's Mr. Joshi pulled the plug on a joint venture with Kodak that was building digital-processing equipment for retailers, refocusing on home printers and allowing him to redeploy 150 people and several million dollars in spending toward the effort. In August 2003, he gathered a dozen lieutenants in his San Diego office and delivered clear marching orders. "Your mission in life is to make home printing mass market," Mr. Joshi says he told the group. "We have to capture every home print we can."

To speed printing, H-P increased the number of nozzles on an ink-jet head, cutting printing time to 40 seconds from 60 seconds. To address consumer fears of complexity, the company last year held 4,000 training sessions to show retail salespeople how quickly H-P's printers can churn out a photo. H-P also created kiosks, now being installed at retailers, where consumers can test cameras and printers.

To tackle the cost of home printing, H-P focused first on paper. H-P had been using paper from expensive specialty mills. Then, last year, H-P executives say they figured out how to make photo-quality paper at a cheaper mass-market mill in Europe, slashing the consumer's price for a 4-by-6 sheet of photo paper to 10 cents, from 30 cents.

Trimming the cost of ink was a more delicate task, because the company relied so heavily on ink profits. So it borrowed a trick from cereal-makers, reducing cartridge prices by putting less ink inside, and making the cost of ink overall appear cheaper. "If we put in a lot of ink and lower the price of the cartridge, we can't make money," says Boris Elisman, H-P's vice president of supplies marketing and sales.

H-P also began searching for ways to tap the booming market for cellphones with cameras. Executives feared camera-phones would encourage consumers to snap and e-mail images without ever printing them. So H-P dispatched employees to interview camera-phone users in Europe and Japan, who said they would print images more often if they could do so by pushing a single button on their phones.

Soon after, H-P agreed to develop printing software to transmit images from phones made by Finland's Nokia Corp. This past February, H-P, Canon Inc. and Seiko Epson Corp. agreed to cooperate on technology standards to make it easier for consumers to print images from many types of camera-phones.

Now H-P is trying another price-cutting strategy, offering a discount to consumers who buy paper and ink together. In August, H-P began selling a bundle of 280 sheets of photo paper and two cartridges for $80, down from $150 if the items are purchased separately. H-P says the combination reduces the cost of a 4-by-6 digital print to 29 cents, from 60 cents.

Consumers are still trying to find a new digital routine. Ana Scofield, a travel writer based in St. Paul, Minn., received a new H-P digital camera from her fiance over the summer. She began snapping pictures of her two teenage children immediately, and to her delight, was able to print the photos out at home on the H-P printer that had come bundled with the digital camera.

But because of the costs and hassles of buying new printer cartridges, she plans to split her printing between H-P and the retailers. "I'll print pictures that I want right away at home," says Ms. Scofield. "But for multiple copies, I'll definitely go to someone else."

As cameras go digital, a race to shape buyer habits

Posted by Craig at November 22, 2004 02:21 PM