HP is No. 1 in the printing market with 42% market share, which is more than the next two competitors combined. HP uses a razor blade business model: printers are sold at low cost, encouraging frequent upgrades to a wide array of printers with non-standard ink cartridge or toner fittings. HP then generates a recurring stream of revenue from cartridge sales. The economics of HP's printing business are phenomenal. To put it in perspective, printer ink costs more than blood by volume and more than caviar by weight.
The high price of ink isn't an accident. HP creates thousands of printer and ink SKUs, which makes it nearly impossible for independent replacement-ink vendors to operate at a profitable scale compared to HP. Check out the number of HP printer SKUs refills offered at Staples
To maintain the ink-cash machine, HP spends $1 billion a year on ink research and development and holds 9,000 patents related to imaging and printing, 4,000 of them for consumable supplies such as ink and cartridges. "Typical ink development might have five PhD chemists working on it for several years and of course an army of technicians," says Nils Miller, an ink and media senior scientist for HP, "and that was just to develop it." HP will also sue to enforce patent rights.
Bears will point out that tablets from Apple
The printing business generates revenue of $25 billion annually at a 15% operating margin (before unallocated corporate overhead). By comparison, Lexmark
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Brendan Mathews owns shares in HQP and APPL. The Motley Fool owns shares of Staples, Apple, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Staples, Amazon.com, and Apple; and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.