One of the very subtle, but also very important aspects of the imaging industry is that not all customers are created equal. An ink jet printer placed in the consumer’s home for use as a personal printer may print as little as 50 pages per month. However, a workgroup laser printer with multi-function capabilities (fax, copy, or scan) which is connected to an office network can print as many as 10,000 or more pages a month. As a result, the multifunction laser printer can be as much as 100 times more profitable than the inkjet printer. And when the comparison is to color workgroup printers, or very high performance printers used in print shops (such as Xerox’s DocuColor line), the comparison can be even more dramatic.

The study clearly indicates three major trends impacting HP's hardware margins. They include:

1. Generation to generation prices are falling faster than costs driving reduced hardware margins;
2. "Entry" laser printers (printers costing less than $250 for mono lasers and $500 for color lasers) are significantly less profitable than workgroup laser printers; and,
3. Color laser printers also offer significantly reduced hardware margins relative to the traditional workgroup laser hardware margin model.

Perhaps most importantly, the report indicates that this change in HP's hardware margin structure has the potential to drive industry-wide margin declines as competitors lower prices in an attempt to create a competitive advantage versus HP.

The positive results have been driven by a relatively benign pricing environment during the first half of 2006 as vendors "lick their wounds" from the intense ’05 price war. Additionally, several vendors have pulled back from their aggressive strategies of gaining market share by offering the lowest price points (Lexmark (LXK) in ink jets, Konica Minolta in color lasers, and Samsung in monochrome lasers).

Hewlitt Packard's (HPQ) willingness to selectively target these vendors and neutralize their price advantage has shown this tactic to be a no win strategy. While these vendors may still have slightly lower prices than HP (typically 15-20%), HP has effectively dropped prices to a point that these vendors cannot compete by offering greater than 20% price discount. The hardware losses just become too large.

In the business world, the best measure for determining if a firm is making progress is to look at operating income. Ultimately, if a company has a strong operating income, it will have the resources to fund marketing and development programs which will provide it with a competitive edge in the marketplace. This will allow the company to make 'headway' even in a stormy environment. Likewise, if the operating income for the industry as whole is increasing, all of the firms in that industry have a better chance of being profitable.

The Photizo Group tracks the operating income for the imaging and printing industry using the Imaging Industry Profit Index. This index measures the operating income generated within the distributed printing / imaging segment by 'stripping out' profits from other businesses (e.g., servers, PCs, etc. for HP). This provides a good yardstick for measuring the 'intensity' of the storm. As the following graph shows the intense price wars in the second and third quarter of a significant impact on industry operating income and drove the industry's operating margin index to its lowest point in two years.