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
The Motley Fool has just released a new special free report that names 3 Hidden Winners of the iPhone, iPad, and Android Revolution, including two companies named in this article and an additional play to consider. Let us do the dirty work for you by sorting through device teardowns and tech specs; all you have to do is get a copy of this free report. Free and easy -- what more could you ask for?