The Real Reason Stratasys, Ltd. Purchased Solid Concepts

As the 3-D printing industry continues to show signs of promise and growth, it'll likely invite new competition, and more often than not, increased competition results in pricing pressures, which can negatively affect the profits of those in the business of selling 3-D printers. On a high level, this is what's known as commoditization, and when an industry experiences it, historically lush profit margins that invited competition in the first place tend to evaporate over time. Stratasys' (SSYS 0.96%) recent move to purchase Solid Concepts, the largest independently operated 3-D printing service bureau in the U.S. for $295 million mitigates the long-term risk of commoditization on the sales of its products while differentiating itself from the competition in the years to come.

Commoditization 101
Thanks a slew of recent patent expirations held by 3D Systems (DDD 2.31%) around a technology known as stereolithography, or SLA, new SLA printers are hitting the market for a fraction of their historical cost. SLA utilizes an ultra-violet-curable liquid and an ultra-violet laser to create highly detailed prototypes and models in a layer-by-layer process. The $3,299 Form 1 desktop SLA 3-D printer from Formlabs uses a near-identical SLA technology to 3D Systems, which 3D Systems has historically reserved for higher-end machines costing well into the five-figure range.

Although it's too early to know if the Form 1 will have a negative effect on 3D Systems' business, it's certainly a powerful and potentially troubling proposition that a new entrant with relatively little 3-D printing experience can democratize access to a high-end technology once a patent expires. As more patents held by 3D Systems and Stratasys around 3-D printing technologies continue to expire, investors should expect to see increased competition, which may force price points lower across the industry. This may put 3D Systems and Stratasys in a position where they face profitability headwinds on the sales of their products, but that may depend on whether or not 3D Systems and Stratasys move beyond current technologies and introduce new and superior patented 3-D printing technologies. 

The value of service
Time and time again, when an industry goes from experiencing tremendous growth to becoming mature and commoditized, the businesses involved ultimately compete for razor-thin margins. The PC, 2-D printer, tablet, and smartphone industries have all experienced this transition, and the 3-D printing industry will likely be no different when the time eventually comes. In order for 3-D printing companies to differentiate themselves in a post-commoditized environment, emphasizing services around 3-D printing will likely become a means for companies to maintain higher profitability. Because there's currently a general lack of experience in the labor force around 3-D printing, the value of 3-D printing services and expertise will likely continue to retain its high value for the foreseeable future.

Having been in business since 1991, Solid Concepts is world renowned when it comes to 3-D printing manufacturing expertise. The company caused quite the stir last November when it created the world's first 3-D printed metal handgun, to demonstrate that 3-D metal printing is a very capable technology.

Source: Solid Concepts.

Not only does Stratasys' move to purchase Solid Concepts broaden its 3-D printing manufacturing expertise, it allows the company to expand its sales channel, target a new class of customers, and diversify its portfolio beyond the scope of its existing technologies.

Long-term focus
Although the threat of significant product commoditization threatening 3-D printing profits is likely many years away from fruition, Stratasys' move to purchase Solid Concepts, which emphasizes 3-D printing as a service, insulates the company from the threat of industrywide commoditization. Investors should be pleased that Stratasys' management continues to take a long-term view that puts the best interest of the business first. Going forward, 3-D printing investors should monitor gross profit margins around 3-D printer sales to get a better sense of the impact that commoditization may have on an underlying business -- and how companies are mitigating this risk.