Kodak's Entry Into Inkjet Printing Market Marginally Negative For H-P, Lexmark

Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients on Eastman Kodak's (EK) announcement it was entering the inkjet printer market, in direct competition with established players like Hewlett-Packard (HPQ) and Lexmark (LXK).

EK’s foray into inkjet could intensify long-term competition but numerous challenges for EK success. EK announced its official entry into the inkjet market this morning with 3 new All-in-One models (available in March/May) and a potentially disruptive strategy aimed at reducing the cost of printing photos (i.e., a marketing strategy w/ higher-priced printers, lower-priced ink). While EK’s efforts could intensify long-term competitive dynamics in an industry experiencing slowing growth, we see a number of challenges that should mitigate EK’s competitive impact, including: 1) changing consumer behavior to focus on printing costs as opposed to upfront hardware costs, 2) decision to charge premium prices for hardware that are above competitive offerings despite less features/functionality, 3) sustaining the investment and capex requirements to compete over longer term, 4) significant time and cost associated with building an installed base, and 5) building out an effective retail distribution strategy (currently only available at Best Buy).

As it pertains to particular vendors:

· HPQ: new competitor but HPQ remains best positioned. While EK represents new competition, our analysis shows that new market entrants typically impact secondary/tertiary players (i.e., LXK, Epson) in the early years as opposed to the market leader (HPQ) – similar to what we saw with Dell's (DELL) entry in 2003. Further, HPQ's has superior product portfolio and technology, brand strength, industry-leading margins and cost structure, significantly greater scale, and better ability to withstand increased pricing pressure. Based on our conversation with HPQ, it has no plans to change its cost per page economics in inkjet (i.e., will not change cartridge pricing).

· LXK: could rekindle talk of DELL partnering with EK. While LXK is not a significant competitor in the photo inkjet area, LXK’s brand position is weaker relative to major players. Moreover, EK’s entry could rekindle talk of DELL partnering with EK for its photo inkjet technology and threatening LXK’s current sole-source relationship with DELL in inkjet.

Stock impact: negative at the margin for HPQ, LXK (increased competition).