HP (NYSE:HPQ) will return to the 3D printer space by mid 2014. CEO Meg Whitman made the announcement at the Canalys Channels Forum in Bangkok, where she said the company will focus on providing affordability and speed. Though timing of the news was somewhat a surprise, the move into the emerging industry was an eventuality for the multinational corporation looking to revive its business. Whitman did give notice, however, that it would take time for the 3D printing business to gain traction, therefore limiting expectations on HP`s upcoming products. For these reasons, the stocks of existing players in the field were not affected.
What does this mean for the 3D printing industry?
HP first ventured into the 3D printing space through a partnership with Stratasys (NASDAQ:SSYS) in 2010 to produce HP-branded 3D printers. The partnership ended in 2012, causing HP to withdraw from the industry, until Whitman's recent announcement. HP's interest to return to the emerging technology is validation that 3D printing does, in fact, have the disruptive potential as many have predicted. Though HP would be considered a late entry into an already crowded market, there still remains large profits to be had. As Stratasys CEO David Reis referenced, the 3D printing market is expected to double by 2016 from its current base of about $3 billion.
HP is behind the learning curve with the 3D printing technology when compared to leaders 3D Systems (NYSE:DDD) and Stratasys. To the surprise of many, these two current leaders have been specializing in the "new" technology for over 25 years. To say HP will eliminate the competition, or even disrupt, due to its resources and distribution network is illogical. In the distant future, if HP can prove to compete with the industry leading pioneers, DDD and SSYS, this may be the case. In 2014 though, HP will be another new entrant looking to make its mark on the growing industry.
The approach HP takes to penetrate the 3D printing industry will be quite telling of its strategy moving forward. The company can attempt to enter the field through internal development; however this would prove to be timely and ineffective as HP has minimal experience and patents concerning 3D printing. To achieve the intended "leader" status Whitman acknowledged, HP will need to take the acquisition route. Odds are HP will acquire smaller companies, which have varied patent portfolios and prior experience to support the move to a new industry.
Consolidation in the industry is imminent as the larger names, including HP, will acquire to grow. 3D Systems stands to lose the most in this scenario due to their aggressive acquisition strategy. Overall, a rising number of acquirers will place a premium on the whole industry making M&A transactions costly. HP will have a clear advantage over current leaders DDD and SSYS due to its sheer size and superior resources. However, integrating acquisitions to restore purchase cost has been a struggle, to say the least, for HP (think Autonomy, EDS and Palm transactions). Due to this fact, buying an already established player in the field (ex. DDD, SSYS, and ExOne (NASDAQ:XONE)) should not be viable as incorporating a completely new business of such size may backfire. In any case, HP will need to enhance its integration process for companies of all sizes in order to successfully implement itself as a leader of 3D printing.
Altogether, I believe HP's announcement to join the 3D printing industry will support the advancement of the technology. Assuming HP can attain its goal of being an influential name in 3D printing, a more competitive field will be beneficial for consumers as competition drives innovation while lowering prices. Additionally, greater adoption of the technology will move 3D printing one step closer towards mainstream status due to HP's production capacity and global market channels.
Competition due to patent expiration
During early 2014, a set of patents expire on selective laser sintering (SLS), a technology which lets 3D printers create more sophisticated high-resolution designs. This impending expiration is being compared to the fused deposition modeling (FDM) patent that expired in 2009, resulting in an upsurge of 3D printing innovation and significant reductions in costs. Speculators have claimed that the SLS patent expiration would cause similar dramatic price drop as Chinese competitors would flood the markets.
More conservative forecasts, however, believe this will not be the case as only the core patents of the SLS technology are expiring (invented in mid 1980s). Any advancement made in the last 30 years is still patent protected. Although there will be some advantages in cost from 2014 patent expiry, it will not plummet as most SLS protection will be in force. SLS is a more complex process requiring more time, expertise and higher costs than FDM which is why it will not experience the same collapse.
The trivial effect of SLS patent expiry is reassuring for shareholders of 3D Systems since the company utilizes SLS technology in its printer mix. Even if the patent expiration will not be a material enough event for DDD operations in 2014, it is a developing risk for the company that investors should keep an eye on. In the Q32013 release, 3D Systems hinted at focusing on market share instead of profits by increasing spending in R&D, marketing and retail channel expansion. In my eyes, this move will carry on DDD's accelerated growth rate so the company can be well positioned against rising risks like patent expirations and increased competition. Additionally, DDD remains keen on leading the way in the 3D printing market. Buzz that HP may acquire 3D Systems is not sensible as DDD would, at a minimum, require a hefty premium. That is assuming the company is even looking to be acquired, which does not seem likely with so much growth to be had independently.
HP did not give a great deal of detail about its upcoming 3D printing products which opens the door for speculation. The following possibilities are up for debate as they are mere opinions. HP's prior partnership with Stratasys could point to a commercial printer rather than a personal one. Also, chances are HP will not use the same FDM technology it did for the Designjet 3D due to its slow printing speed. Instead, the "new technology" Whitman hinted at in Bangkok could potentially have something to do with printing transparent glass, a project HP Labs was working on in 2012. A breakthrough in this printing method would give HP a good starting point as printing glass is a challenge in the industry. This would also spell trouble for ExOne due to its involvement with glass printing.
Mr. Market's efficiency was accurate with HP's announcement that it was expanding operations into the 3D printing industry. The news did not shake any of the existing players' quotes and rightfully so. HP set out some ambitious goals with their claim to release a new, cheaper and faster 3D printing technology by mid-2014. Until HP can walk the walk, 3D Systems and Stratasys will remain the high growth leaders of the disruptive technology due to their extensive experience and diverse patent portfolios. Although HP may have greater access to resources, thus helping with acquisitions, the company's recent history of M&A failures cannot be overlooked. Ample challenges lay ahead for HP's expansion into 3D printing, but nonetheless, the move is a step forward for the company looking to regain its footing. For HP, this move was better late than never.