From the September 2019 Issue - “Irrational Exuberance?"
The phrase “irrational exuberance” entered the vernacular in 1996. Then Federal Reserve Bank Chairman Alan Greenspan used it in a speech to describe a concern he had for the way the values of certain assets had recently been rising in the economy. At the time, he was referring mostly to early dot-com companies. These days, the 93-year old Greenspan seldom comments on the economy. But if he did, one wonders if he’d use “irrational exuberance” to characterize the growing rash of MFP dealer acquisitions.
In just the past three years, around 250 US dealers have been acquired. Many were purchased directly by larger dealers; some by hardcopy manufacturers. While the pace has surely hastened, it’s hardly a new development. But what has changed is the growing presence of professional investment funds and private equity money, either to buy key dealers or to fund avowed channel consolidators, such as FlexPrint, Visual Edge, Marco and UBEO. There’s also the potential for Staples/DEX to become a truly disruptive PE-funded force in the dealer channel.
It’s not that the (mostly US) office equipment dealers being purchased are weak companies, have bad management, or are delivering poor financial results. It’s actually quite the opposite. They’re typically the cream of the crop. And the valuations are certainly not all that exorbitant compared to many other kinds of IT businesses. Paying more than two times trailing annual sales for an MFP dealer is still exceedingly rare.
What increasingly concerns me is the basis on which purchasers are justifying their acquisitions, and the higher prices they seem willing to pay. The issue is not so much when a local dealer buys a small competing dealer or broadens its territory via acquisition. And it’s also not when a manufacturer fills a distribution hole or protects its current coverage by purchasing a dealer. My questions relate to the professional money that’s so aggressively funding this new era of roll-ups.
These types of investors and that kind of money are neither patient nor transformative. PE firms aren’t in the business of mentoring and molding. Their strategy rests on buying decent companies, slashing expenses, curtailing big new investments, perhaps loading the company up with debt, and then finding someone else to purchase the whole thing in five or so years. PE firms couldn’t care less who or what the buyer is. It could be new shareholders via the stock market; a related hardware, software or IT channel player; or just another channel roll-up company.
And there’s the rub. These professional money people are acquiring good or even great dealers that are already outperforming their peers, But this is a hardcopy industry that’s shrinking (slowly now, faster later), in need of massive investment and major transformation, and facing entrenched competition as it seeks to diversify.
Let me be brutally clear, without significant new money, fresh ideas, and a bit of luck, there’s little reason to believe most of today’s MFP dealers will be bigger or more valuable five years from now. And to the extent they are, it will have come mostly from doubling down on a declining industry and purchasing smaller competitors. All that only postpones the day of reckoning, and it makes massive change even more difficult. None of that’s a prescription for successful investing in the PE world.
I’d be more sanguine if there were evidence big swaths of the dealer community were further along the bumpy road toward becoming diversified players in the IT channel. But there are hardly any valid proof points out there. Perusing the latest data from the 34th Annual Dealer Survey in The Cannata Report puts the kibosh on any optimism in that regard.
These aren’t also-ran dealerships. The average one in the survey had $16.3 million in revenue, and 65% of them reported higher sales last year. But look at managed network services (MNS). For years now, it’s been hyped as absolutely the best adjacent alternative marketplace into which MFP dealers should invest and can diversify.
The Cannata survey found fewer than half of all dealers (44%) have even dabbled in MNS, and the majority of those who had (56%) derived less than 5% of their revenue from that business. Even the most accomplished dealers almost never got over 10% of their sales from MNS. The vast majority of dealers are taking a go-slow approach to MNS, either growing the business themselves (57%) or partnering with an OEM or another company that’s already doing it (45%). Only 19% said they had acquired an MNS provider to enter the market. Moreover, none of this says anything about whether dealers are making money in MNS, let alone MFP-style profits. Anecdotally, many successful midsize dealers tell me it takes several years in MNS just to break even.
And there’s the rub. I realize I’m the oddball here, but I just can’t believe today’s “smart” PE money is funding so many acquisitions of dealers who have proven supremely adept at serving yesterday’s shrinking MFP market, but are barely in the very earliest stages of figuring out how to reinvent themselves for tomorrow. I just don’t see the path or the time frame for a huge PE payoff down the line. So color me skeptical.
From the August 2019 Issue - “Tick-Tock ... I Don’t Get This Clock”
It’s been a dozen years since hardcopy device placements and printed pages peaked globally. And it’s been a decade since the Great Recession ended. So one might think hardcopy vendors — especially the biggest and most print-dependent ones — would have spent the past ten years steering their respective companies toward new opportunities. Unfortunately, one would largely be wrong to think the results from sound policies of diversification would now be evident.
After all, these vendors are public companies with a fiduciary responsibility to stockholders, and a moral responsibility to employees, partners, suppliers and communities. True, there have been two instances in which important hardcopy vendors did aggressively diversify. Xerox acquired ACS in 2009 to expand into BPO and IT services, and Lexmark bought multiple document capture and management software firms from 2010 to 2015. But both companies failed, and those deals were unraveled in 2017.
So I decided this month to get a better grasp of where hardcopy vendor diversification stands today. I looked at total revenue and hardcopy revenue for the nine largest print vendors that depend most significantly on hardcopy as a share of their business. I did this for 2008 — a decade ago and in the midst of the Great Recession — and for 2018 or the closest complete fiscal year. And what I found is cause for great concern, both individually for nearly every major vendor and for the entire hardcopy industry.
The nine vendors I evaluated were Brother, Canon, Epson, Fujifilm, HP, Konica Minolta, Lexmark (even though it’s no longer a separate company), Ricoh, and Xerox. I obtained revenue data from each company’s public financial reports. I converted yen values for the Japanese vendors to dollars using contemporaneous exchange rates. Yes, I understand the limitations of that approach. But since my focus was on hardcopy revenue intensity, rather than absolute revenue numbers, I think it was a reasonable approach.
For the most part, I used vendors’ own categorization of what constituted print revenue, including consumer, office, production and industrial print. However, it can be difficult to figure out what to do with revenue these vendors report for adjacent services and software, particularly revenue from IT services, BPO services, and ECM solutions. Suffice to say, I used my best judgment to try and produce data that was comparable.
First, the big picture. These top nine vendors did $125 billion in hardcopy revenue in 2008, which accounted for 49% of their combined total revenue. Those same vendors generated $91 billion in print revenue in 2018, representing 53% of their combined revenue. So over the past decade, their collective hardcopy revenue fell 27%, but their total revenue dropped 33%. So their collective hardcopy revenue intensity rose 4%. But the average hardcopy revenue intensity for the nine companies did drop by a slight 1.5%.
In other words — and very sadly — there is no indication from revenue that the biggest, most print-dependant vendors have done a whole lot to lessen their reliance on a clearly declining print industry. In fact, even the slight drop in average dependence on printing among these top vendors is more because their non-print revenue fell faster than their print revenue.
As one might expect, there was certainly variability among the companies. Basically, there were three clusters of vendors. Xerox and Lexmark are straightforward. They were both nearly 100% dependent on printing in 2008 and in 2018, despite what happened in between. And their printing revenue dropped more than 40% over the past decade.
Conversely, HP, Epson and Konica Minolta actually ended up more dependant on hardcopy in 2018 than they were in 2008. Of course, HP did split off half the company to form HPE in 2015, but its print revenue also decreased by almost 30%. Konica Minolta became more dependent on printing because its non-print revenue fell faster than its print revenue fell. And with Epson, its printing revenue was pretty much the same in 2018 as it was in 2008, but its non-print revenue declined 13% during that same decade.
Ricoh, Canon, Brother and Fujifilm did manage to reduce the portion of revenue they got from printing between 2008 and 2018 by 20%, 9%, 8% and 3%, respectively. But each case is different. Fujifilm achieved this by having its print revenue fall faster than its non-print revenue fell. Ricoh and Canon did it by boosting their non-print revenue, although much less than the declines they experienced in hardcopy revenue.
That leaves Brother, which was the only vendor on my list of nine companies that grew its hardcopy revenue — largely due to the purchase of Domino in 2015 — and also grew the non-print (albeit smaller) side of its business even more in dollar terms. So there’s one sort of success.
But from my admittedly jaded perspective, here’s the bottom line. The top print-dependent vendors have experienced a lost decade to meaningfully lessen their individual and collective reliance on a shrinking hardcopy industry. So how likely is it that they’ll get it right over the next decade?
From the July 2019 Issue - “On Borrowed Time?”
We all know that old saw, “Nothing is certain but death and taxes.” Well, I’m adding a third item to that list: RECESSION! And while most folks tend to make plans for dealing with death and taxes, few people — or companies — seem to plan for the eventuality of the next recession. Certainly, there’s no evidence that hardcopy vendors are planning for the next big downturn, and all the drama and damage it will portend for printing.
That’s too bad, but it shouldn’t come as a surprise. We’ve been on borrowed time. In July, the economic expansion that began a decade ago in June 2009 became the longest in US history. By some measures, the odds of a downturn are now the same as back in July 2007. That’s when the subprime debt crisis that brought on the Great Recession kicked into high gear. Depending on the forecast and what’s being monitored, the odds now are between 20% and 65% that the US will experience the first of two or more consecutive quarters of GDP contraction in the next year. And that’s how we define a recession.
Because today’s trade brinksmanship is the main catalyst, the coming recession will spread from the US to China and beyond. Even if it were to be shallower, shorter and less global than the Great Recession, the impact across the printing market could end up being more deleterious.
For too many in the hardcopy world, the Great Recession is but an increasingly distant memory. But it’s critical to recall the destruction that was brought down on printing. Through 2008, there had generally been a strong correlation between GDP and cutsheet paper sales, particularly in the US. When the economy grew, so did print volume; and when the economy contracted, so too did sales of cutsheet stock. That all ended in 2008, with some help from the Great Recession.
It’s now more than a decade later, and 2008 still stands as the peak for total printed pages in the US and worldwide. And not coincidentally, 2007 had marked the zenith for total hardcopy device placements. I editorialized about these terrifying twin peaks a decade ago (“Peak-a-Boo-Hoo,” May 09). I postulated back then that even a quick return to modest growth in placements would yield a lost decade before sales of hardcopy devices reached pre-recession levels. It’s clear now that was a pie-in-the-sky dream. In fact, such lofty levels of placements and pages have never again been reached. Instead, both key metrics have sloped downward ever since.
I’ll be the first to admit I have a mixed record with my warnings and predictions, but I’m going to take a bow for that old editorial. What I recommended for the industry and its players back in 2009 was spot on. I called it the “Four C’s.” My sage advice called for consolidation to eliminate weaker vendors and grow share in a stagnant market; culling to get rid of excess plants, people and sales outlets; creativity in developing new service and software revenue streams; and cash, which would determine who could manage to invest the most and hold on the longest.
Sadly, hardcopy companies haven’t done anywhere nearly as much as they needed to on any of these four fronts. That’s why I believe the coming inevitable recession will be extremely painful for this industry.
Currently, there are no truly successful hardcopy companies. Vendors like HP, Canon and Konica Minolta have at various times in recent years produced pretty good numbers on their top line or their bottom line, although seldom for both. But a couple or few good quarters has proven to be a poor predictor of what’s next. Look no further than the latest figures covered in the issue for some top MFP vendors.
The biggest missed opportunity is been that vendors have failed to make, buy or grow successful ancillary or unrelated businesses that materially lessen their dependence on hardcopy. All that’s saved these companies is that moderately well run hardcopy operations still throw off lots of cash. Sadly, way too much of that cash has been wasted on shortsighted stock buybacks and ill-conceived acquisitions. In short, the industry has wasted the fruits of an unprecedented decade-long economic expansion. And this must be seen for what it truly is — a failure of strategy, leadership and execution of the highest order.
So what should we expect a year or two or three from now, when we’re all in the midst of a recession? That long-promised vendor consolidation? It will be in full swing. But these won’t be marriages of strength; it will be the mediocre buying the weak. And there will be casualties. Some companies will close down their printing units, or sell them off at fire sale prices. Cash to fund belated diversification will be in short supply. Just a few vendors will hop over to become small makers of industrial or 3-D print devices.
Hardcopy technology providers and software partners are already heading for the hills. I expect their customers — and their ever-younger leaders and employees — will really step up efforts to transform workflows such that a lot more paper is eliminated forever. In the channel, most small dealers will vanish, while a few large dealers will leverage their hardcopy cash to buy a new future in some adjacent segment of the IT world. In short. It’s gonna be ugly. ... Real ugly.
From the June 2019 Issue - “Let’s Tame the Rapture Over Capture”
Those who make, sell and comment on office MFPs — and that includes yours truly here — have long exhibited a certain rapturous infatuation with the scanning function on said devices. Document capture has been seen, inter alia, as a foundational differentiator between MFPs and single-function printers; an overdue enabler for digital communication; a catalyst for application development and integration; and a springboard for improved business workflows and efficiency.
And to varying degrees, all of the above have proven to be true. Unfortunately for the industry, however, what’s also increasingly true is that there’s not a terribly large, growing or profitable return on all that’s collectively been invested in MFP-based scanning hardware, software, marketing, partnering, sales and support. And there’s good reason to believe things will only get worse, or at best they’ll stay the same.
There is some good news ... for customers and those who have to keep them happy. The ease of use, quality, speed and reliability of scanners on office-grade MFPs have never been better. Vendors are increasingly including or offering single-pass duplex document feeders that operate much faster than the print engines with which they’re paired. Good image enhancement and misfeed detection are less rare than they used to be. Smartphone-like control panels and one-button scanning are pretty much the norm. And integration with the cloud is almost a given. So the once canyonlike gap between MFPs and document scanners has narrowed appreciably.
However — and it’s a huge however — the volume of scanning in the front office faces stiff headwinds, even while the number of people who are happily scanning remains quite strong. Full disclosure ... this is my own qualitative, anecdotal, logical, but informed assessment. I don’t have reams of data to prove it. So humor me.
Walk-up scanning on a shared office MFP has always been an ad hoc affair, driven by simple communication, personal archival, and extracting or repurposing content. Each of these presumes that paper documents are the most convenient starting point. But not only is the volume of printed pages declining, it’s more likely now one can readily obtain the underlying digital file. It may be in a corporate ECM system, accessible from a line-of-business application, on the web, or simply in the cloud. And increasingly, one can view the document on a phone with a few taps. So scanning is relegated to handling exceptions.
This doesn’t mean that customers will tolerate poor scans or complex capture solutions. But they’re less inclined to pay for capture, or to pay for more advanced or specialized document capture solutions, connectors, apps and services.
We’ve been seeing evidence of this trend for several years. Yet MFP vendors have been telling themselves and their dealers to ignore the facts. So instead, the industry tells itself that rising revenue from more capable, more diverse and more specialized capture solutions is just around the corner, and it’s certain to backfill declining revenue from devices and prints.
But evidence to the contrary is in plain sight. Start with the fact that those early yeoman efforts from some dealers and branches to charge customers for their scans have failed almost universally. Then there’s the troubled track record of vendors and dealers who’ve sought to build profitable scan services businesses. What they found is that backfile conversion is a shrinking niche market. High-volume scanning is done on dedicated scanners, behind the scenes or offsite. And successfully operating a scan service is akin to running a fast food restaurant, with long hours, low wages, lots of staff turnover, low prices, and an elusive quest for consistent quality. Most often, a scan operation has to be run as a totally separate unit.
Then there’s the track record for developers of MFP-oriented scanning software. Look no further than the old Nuance Document Imaging unit, which is now part of Kofax. Nuance’s MFP capture software business was shrinking in absolute and relative terms for years. Rumors have swirled that the company at times had to resort to discounting or even giving away its capture software as a sweetener for deals involving its far more monetizable printing solutions. Meanwhile, the rest of Kofax — as well as capture stalwarts like ABBYY and OpenText — barely pay attention to MFP-related opportunities. And print-centric developers like YSoft and NT-ware have added basic capture capabilities simply as the cost of admission to sell their print solutions.
In the wake of these developments, MFP vendors and their channel partners have been left pursuing oddly bifurcated responses. Either they leap upstream into the world of BPO, ECM, forms processing and perhaps even RPA, where they typically lack expertise and a track record, while facing a host of competitors. Or they dive downmarket into a world of scanning apps, one-touch macros, and cloud capture connectors that may entice some customers but don’t typically generate a lot of new or profitable sales.
None of this is intended to mean there’s absolutely no business for MFP-based capture software. But what it does mean is that capture is no cure-all for what ails the office MFP industry.
From the May 2019 Issue - “So What’s a Bird in the Hand Worth?”
It was quite fitting that HP chose this month to announce its Neverstop Laser products, as May marked the 35th anniversary of HP launching the original LaserJet printer. But it was strange that HP didn’t mention the timing. Perhaps it’s because HP didn’t want to attract too much attention to the broader implications of its news. The Neverstop Laser devices don’t just alter the personal economics of printing. They could portend a fundamental departure from the annuity-based business model that’s undergirded the entire hardcopy industry for the past sixty years.
HP isn’t the first company to start chipping away at the traditional supplies-based revenue stream and profit model. That honor goes to Epson, which a decade ago introduced the first inkjet units with refillable ink tanks. But HP is the first to bring the disruptive economics of ink tanks into new laser devices with refillable toner tanks.
The impetus for this change is the same for inkjet and laser. More customers more often these days are choosing to sidestep the old norms that said it’s best to buy ink and toner made by the same company that built the printer, AIO or MFP you own. One pays more — a lot more — but it’s safer. There have always been customers who opted for lower-priced off-brand supplies, but lately that trend has accelerated. Look at HP’s wobbly printing results this fiscal year to appreciate the massive impact a tiny change in supplies can have on the top-line and the bottom-line.
It’s tempting to dismiss the Neverstop Laser initiative as another halfhearted HP response to this dynamic. After all, the three-year old LaserJet Ultra products were a reaction to the exact same trend. Yet they haven’t gone very far economically or geographically. But there are reasons to believe things will be different this time with HP’s new Neverstop Laser models.
For starters, HP has put quite a lot of marketing muscle behind the Neverstop Laser launch, even in the US and other markets where the products won’t be sold. There’s also the aforementioned supplies-have-once-again-tanked-our-numbers financial issues that are playing out inside HP. And then there’s the underappreciated lesson of what’s quietly happening over in inkjet printing.
Look at Epson. Those first “ME” ink tank models didn’t take the printing world by storm ten years ago. They were few in number, sold only in select markets, and a bit kludgy. But by FY2015, ink tank models were one out of every three inkjet AIOs and printers that Epson sold worldwide. Three years later in FY2018, ink tank models accounted for 58% of Epson’s inkjet placements. And that percentage is expected to reach 63% in FY2019, and 74% in FY2021. By the way, Epson’s total inkjet placement were also 10% higher in FY2018 than in FY2015 ... in a down market. Epson can thank ink tanks for all that.
Don’t you think that history and those outcomes are foremost in HP’s mind when it comes to these very first toner tank devices? I’m also inclined to believe there’s a critical mass of small business shoppers in many developing markets today who own ink tank AIOs or printers, and they’re now favorably inclined to consider similar laser devices.
But how the printing marketplace and vendors react from here on is now sort of a chicken-and-egg issue. Will HP be able to sell enough of its first four Neverstop Laser products? How soon will HP need to expand the number and range of models in terms of speed, color and capability? Will other vendors enter the toner tank business? And will their arrival be guardedly proactive or purely reactive? Competitors took way too long to respond to the global inroads Epson made with its ink tank products. Will laser vendors want to risk repeating that same mistake now with toner tanks?
There’s also something brilliantly devious about all this. Sure, these “tank” models cost more. But they come with a couple years of supplies, and the page costs after that are super low. I can’t help but think vendors are conditioning customers to get increasingly comfortable prepaying for more supplies. Who’s to say ink and toner won’t soon be sold like an extended warranty? The longer the period you opt for up front, the less you pay per page. And lest we forget, prepaid warranties are one of the most profitable items sold in retail markets. In a world of ever-declining print volumes, many buyers will tend to overestimate how much ink or toner they’ll ever use over the life of that printer, AIO or MFP.
Of course, it’s more than a little ironic that HP’s intentional lessening of the role supplies play in the annuity-based economics of printing is taking place at the same time the whole IT industry — including every MFP vendor — is desperately trying to create new annuity-based businesses. You can’t talk to an MFP company these days without some whiz-bang “as-a-service” initiative smacking you in the face, whether it’s SaaS-based ECM, cloud infrastructure, app subscriptions, usage-based scanning, or IT services.
So what’s the lesson? It’s twofold. There’s a need for and an opportunity for business model innovation at both ends of the hardcopy market. And office MFP vendors who overlook what’s happening downmarket do so at their own peril. So tanks a lot.
From the April 2019 Issue - “Soft Lies ... Hard Truths”
Every few years, factions in the hardcopy industry come up with what they believe to be a simple, obvious and brilliant idea. MFP vendors decide they ought to expand into the “adjacent” document management software market. This used to be seen as a way to go on the offensive and grow one’s “share of wallet.” But increasingly, it’s now seen as a defensive stratagem to counter falling placements, pages and prices.
But there’s one teeny problem. No proof points exist to support the idea that diversifying into document management software (or enterprise content management, cloud storage portals or whatever nom de guerre you choose) is a great move. Indeed, there’s plenty of evidence to the contrary — that the outcome will be somewhere between simply ineffective and downright disastrous. And the odds that an MFP vendor will bomb bigly in this software domain are now greater than ever.
It doesn’t matter if a hardcopy vendor’s particular document management solution is homegrown or acquired, or if it’s above or below par in scope or quality. Look no further than HP with Tower and then Autonomy, and Lexmark with Perceptive, Kofax and multiple others. There was no “1+1=3” with these deals, not for the incumbent hardcopy business and not for the acquired software entities. HP and Lexmark had to sell off or spin off the assets for far less than what they had paid and invested. And those software entities emerged smaller, weaker and with compromised independence. In fact, many relevant parts of these software entities are all but gone.
And there are other examples with less scale and notoriety, like Ricoh with Document Mall (Ricoh Content Manager); Canon with ADOS (Therefore); and Kyocera with Ceyoniq and Alos.
It’s not just acquired solutions that are problematic. Look at DocuShare. Xerox has been beating that dead but homegrown horse nonstop for 22 years. And for what? DocuShare does zippo for Xerox’s hardware and managed services businesses, and those businesses do very little for DocuShare. That Xerox could likely have sold off DocuShare for a moderate sum in years past makes today’s awkwardly naive fawning over the software by a new management team all the more embarrassing and pathetic. Make it stop!
This isn’t to say there aren’t some common threads and lessons to learn. Two of them are biggies. First, hardware and software generally aren’t a great mix for vendors, unless the software is so critically enabling and aligned as to give customers a fundamental reason to buy the hardware. Hardcopy vendors have done their darndest to convince themselves that document /content management software fits this key criterion. But it doesn’t. Case closed. Now hush.
Second and much less appreciated or understood in the hardcopy business is the simple fact that document/content management software — even when done well and with great focus — ain’t that great a business. Waves of consolidation have already come and gone. Sure, some forecasters point to annual growth around 15% for the next few years. But it looks like a lot of that expansion is really driven by widening the definition of what constitutes document/content management to include historically separate but related areas like capture, search, and file sharing.
And to the extent it’s an OK-ish business, revenue generation is overwhelmingly dominated by big players like IBM, Microsoft, Oracle, OpenText, Hyland and Micro Focus. Successful small vendors like Laserfiche, DocuWare and M-Files have had to spent decades attaining and defending their relatively thin slices of this market.
Meanwhile, “the cloud” is changing things big time. In theory, this type of generational disruption creates opportunities for new players. And it sorta is. But those opportunities seem to be accruing to big cloud vendors, like Box and Google and Dropbox. At the same time, incumbent document/content management solution vendors are busily trying to convert their own offerings, channel partners and customers to the cloud. And that doesn’t leave a lot of space for inept printer companies to swoop in for the kill.
So what about MFP vendors who sidestep the business of making or buying the software, and instead just cozy up to some established document/content developers as partners? That can work, but hardcopy companies need to have much more realistic (i.e., low) expectations.
There are only a few such vendors who target MFP channels (e.g., DocuWare, Square-9) or who’ve stumbled into the industry and learned to live with it (e.g., Laserfiche, M-Files). These aren’t big players. Sure, lots of MFP vendors claim to be besties with Hyland, but those vendors together are a tiny sliver of Hyland’s sales. And to the extent MFP vendors have had modest success, it’s precisely because they’ve made no serious efforts to create any pseudo-synergy.
There are some dealers who’ve succeeded with document/content management software, but it’s almost always been separate from or even in spite of what their MFP suppliers have done. The bottom line? MFPs and content software can be friends. They can even date. But they shouldn’t marry. And no one wants to see the offspring.