Print is Dead. Long Live Print. (1)

There is a basic assumption in the imaging industry that people and companies will always print, and that therefore the imaging industry is robust, recession-proof and has a bright future. We generally agree with this optimistic assessment and are great believers that while total print volume will gradually decline, a shift from static/analogue to variable/digital content will ensure that key print segments remain stable and may even grow.

Nonetheless, several recent articles have attracted our attention, all of which somehow bring this assumption into question. First, John Dvorak, the respected IT journalist, commented on the recent decision of PC Magazine to discontinue their print publication and provide only digital content: “The venerable PC Magazine going 100% digital coincides with the trend of media and information distribution doing the same, but further emphasizes the fact that the computer scene, in general, is not interesting enough to sustain a printed magazine.” This observation is astounding - you would never believe that the popular and ever-changing computer industry would run out of content (amount and interest level) to fill a regular publication. He goes on to make his case about the quirks of the PC industry that limit the newsworthy content and publications’ interest in reporting, but still the development is remarkable.

Secondly, Dan Costa in PC Magazine comments on the same decision but also extrapolates to more general social trends: “Trouble is, print publishing is hugely flawed. . . . Print media is simply behind the times by design. Print businesses aren't dead, but they do need to change. Printing should be reserved for archival information—artifacts you'll hold on to for years instead of hours or days.” This observation is also interesting, because we know from several sources that a great amount of corporate printing has a short term character, more as a temporary user interface (case in point: printing and re-printing e-mail and documents for review, sharing, taking notes, etc.) than as an archive. We can expect shifts in usage patterns in the office as well, driven either by economic pressures or by generational tendencies.

Lastly, we read in Media Life that the Detroit media landscape is about to shift radically and may signal similar changes in other metropolitan areas:  “Detroit is one of the last major two-newspaper cities, and soon it will become the first to stop home delivery on all but a handful of days and shift some of its focus to the web, in a major overhaul that highlights just how dire things have become for the nation’s major metropolitan papers.”  An animated (electronic) discussion ensued which debated the wisdom of both papers taking the same step, the questionable logic of trying to keep hard-copy versions going on some but not all days, and the public service aspect of supplying news and information to those citizens who do not have an internet connection.  

Taking our basic digital/variable data sentiment to the extreme, it could conceivably be possible for these publishers to continue their print operations with highly targeted and individualized versions. Add value to justify, or even increase, the selling price and expand circulation: if your neighbor prefers sports in his newspaper and engineering applications in his PC Magazine, he can have that, and you can have the in-depth business and programming coverage that you prefer. The technology is there, but the production and delivery processes would need to be rebuilt. It is presumably easier to go electronic . . .

In fairness to Dan Costa, he did touch on this idea: “Big publishers will continue to scale back on their print operations, but there are millions of micropublishers out there with how-to books, cookbooks, memoirs, even love letters that they can now affordably publish and make available to the world.” Further: “Sure, you say, but those are books. What about magazines, you ask. I would argue that the difference between books and magazines is simply about the publishing schedule, at this point.”

The point is that the world of print will undergo drastic changes, but it is not (yet) possible to predict whether digital print will decline as a result. If millions of micropublishers take up the challenge and implement this approach effectively, OEMs can look forward to attractive business for a long time. But every imaging vendor will have to decide how to address this issue, and this will affect their prospects for future success as well. Stay tuned . . .

Kodak - a picture of desperation

It is not news that Kodak is going through an identity (and financial) crisis of considerable proportions, but the news today highlights the point dramatically. Kodak today withdrew their guidance for second-half and full year outlooks and also announced drastic cost saving measures, including canceling 401(k) matching and executive pay raises.

Kodak management some time ago recognized that their core business has to change, or they will be changed (let's say "demolished") by external events. Other companies have encountered similar epiphanies, such as when Xerox stated that their established business was "fundamentally unsustainable" and then went to work methodically rebuild. Results speak for themselves.  Also, when Konica Minolta decided to exit the camera business, it probably tore some people's hearts out. But it was the right thing to do, and while we can still question the judgement and strategies of present management, it would have been suicidal to stay in the camera business.

Now to Kodak, who also faced a similar juncture and decided to rebuild and go digital. Despite some heroic efforts to restructure the company and refocus the business, strategies and results have remained mixed.  They did move quickly into the digital world, which is commendable, but how wise was it to keep such a strong focus on the consumer end of the business?  Yes, there is (or was) the considerable value in the brand, but why try to leverage that in the low-end printer business?  Maybe there was some belief that this would be the best place to transfer the consumer brand and build a new, digital annuity business. The days of film are gone, but here come the days of ink cartridges . . .  The brand is far from dead, but we would not overrate its value in the present-day world of consumer electronics.

Regarding the value of the printing business, we have done some work in that area, building a series of bottom-up business models.  Looking at individual product segments and revenue/profitability streams, you can construct a highly reliable model and work through variable future scenarios. The Kodak business model we have developed is a revelation to understand the dynamics and constraints within the company.  Comparing the usage patterns and output volumes of the respective product segments, we can see the opportunities as well as the cost implications of those business areas.  

It might be (just a bit) overstated to call Kodak desperate, but they clearly need to focus more precisely on their most profitable business areas.  They have some promising products and technologies, for example in the Graphic Communications Group, though results have been spotty enough to make the case that focus and resources have been lacking to date. As Kodak further shifts priorities and resources, today's decision will almost certainly have ramifications for the Consumer Digital Imaging Group.

Who would have thought?

The sign of a good index is when it acts and provides information like a microcosm of the real world. Select a good representative set of companies, avoid the messiness of identifying and tracking the long tail of the last x% of the entire universe. Consolidated, the group serves as a mirror and a magnifying glass for the selected industry. Individually, you can still track and compare the results, strengths and weaknesses of specific companies.

Woodford Group and our partners/predecessors Photizo Group have been tracking and analyzing the operating results of key companies in the imaging industry for 19 quarters now. These companies make up well over 90% of the industry, and one amazing discovery point is how stable this market is. Considering the range of technology breakthroughs and economic swings over the past 5 years, the Imaging Industry Margin Index demonstrates in numbers what we have stated previously: the imaging industry always seems to find a way to maintain earnings momentum.

The imaging industry as a whole is a bit unglamorous, not as attractive as many other tech products and trends.  But in fact it delivers mission-critical products and services throughout the business and private worlds, in various and ever-changing forms. The annuity-based business model, accompanied by new applications and services, delivers consistent returns for those companies best equipped with the right focus on key success factors, namely product portfolios as well as execution and financial management skills.

The Imaging Industry Margin Index is in fact a lagging indicator, examining recent events to discern a trend. But considering the fact that a recession has been pronounced to be in effect since December 2007, the results are significant: the resilience of the imaging industry is evident.  A modest dip is present and not surprising, but there is no dive.  The index has dipped lower in other quarters, and the overall trend is stable and positive.  

If we look into the index in more detail, there are naturally a few stinkers.  But while a few companies definitely put a drag on the overall result, we see these as examples of internal misalignment as opposed to economy-related issues. We can return to the trio of success levers of product portfolio, execution and financial management: the poor results of those companies who were hurting can be traced to some (or all) of those factors. Economic pressure certainly serves to expose underlying weaknesses, and recent earnings calls were indicative of the true influences: as much as some companies tended to blame the external economic or market influences, other companies demonstrated their mastery of the key levers. Even in the context of the current economic difficulties, their results (and those of the industry as a whole) showed a surprising steadiness.

Who would have thought?