Manufacturers such as Lexmark (NYSE:LXK) and Hewlett Packard (NYSE:HPQ) have traditionally used the razor/blades approach to sales, subsidizing the initial cost of the printer and making up for it as customers buy high-margin replacement toner and ink. When the typical printer cost $700 and the replacement ink/toner was $30-$50, this strategy worked fine. Customers tended to own the machine far longer and buy multiple replacement cartridges.
As with all electronics, however, hardware prices declined rapidly. As early as 2003, one could occasionally find a basic black-and-white inkjet printer (with ink) on sale for as low a price as the replacement ink cartridge. Customers realized the printer was a better deal than the ink alone and frequently upgraded to a newer printer rather than buy replacement ink.
This action hurt the manufacturers in two ways: first it resulted in a new printer sale at a negative profit margin; second, it deprived them of the ink sale that was supposed to make the original printer profitable over its life span. Suddenly, instead of a five year life and possibly dozens of ink replacements, customers were keeping printers for 1-2 years and only replacing the ink a handful of times.
'No matter,' the manufacturers said, 'we will focus on higher value printers such as color, laser and multi-function (printer/copier/fax) devices.' These still sell for higher prices and validate the razor/blade model.
Anyone can guess what happens next -- three years later we have color, duplex laser printers for a couple hundies. It won’t be long before the color laser MFP is selling for less than $100, and by then the old business model will be completely dead. And we aren’t even talking about the ink/toner refill business, which continues to grow and further cuts into the potential profits.
The problem, though, is that none of the existing players can shift the business model to selling hardware at a profit unless all of the other players go along as well. And right now there are just too many players looking to compete in the market for that to happen. Somebody will go against the grain in order to gain market share, and the subsidized hardware will be back again.