This week HP bought Samsung’s printer business which may seem anything but a no-brainer because the printer market has been in decline for the last decade. Why would you buy a declining business? There is actually method behind this seeming madness and it comes down to where the firm is in the market, where the profit is and how fast the market is declining.
Let me walk you through the market dynamics and why this actually does make sense for Samsung (News - Alert) to exit and HP to double down.
Looking back, IBM was the dominant Mainframe manufacturer when that market went into decline in the 1980s. They remained in the market even though everyone else exited and continued to invest, updating the platform over time. The mainframe market, now decades later, is a fraction of what it once was but IBM (News - Alert) now owns the entire fraction and it remains one of IBM’s most profitable businesses. This is because, as a dominant vendor, you can move to own a market and, because of the elimination of competitive costs, make your growing part of the market more profitable as it declines. The closer you get to 100 percent market share, the less cost you incur for marketing because the remaining customers have to increasingly buy from you since you are either the only one left or the only one that isn’t likely to exit, leaving the buyer with products they can’t then support.
Now, if you aren’t dominant, finding a way to sell out before your smaller position is overrun by the soon to be dominant vendor is your best path. Thus Samsung was willing to sell to HP to get value from an asset that otherwise might turn valueless and HP was willing to buy because it gets them closer to their end game. Samsung’s strong position in the Asian market and in copiers increased the value of their property but didn’t increase their position enough for them to attempt dominance; HP was and is simply too far ahead.
There effectively is no profit in printers. The profit is in supplies, ink or toner and paper. In fact, most printers are sold at or below cost to lock the buyer into ink and toner sales which are highly profitable. If the profit were in the printers, then the risk on the conversion would be that continued sales to Samsung customers couldn’t be guaranteed. But, given it is the supplies HP is effectively buying as a more assured revenue stream, an annuity if you will, the current Samsung printer owners will now shift to buying supplies from HP and HP is in a better position to upgrade those printers, shifting them to more traditional HP supplies over time.
Like the mainframe decline which folks thought was going to drop like a rock, the printer decline has been far slower than expected. We tend to be a race that really dislikes change and, while there was a huge move from paper to tablets when the iPad peaked, tablet sales have fallen like a rock and the vast majority of us are still largely using printers; granted it is still a decline, but a far slower one that it seemed it would be during the peak of the iPad craze. This means there will be substantial profit opportunity through the next decade unless something else really disruptive moves in to change this. So, once again, it makes sense for a dominant player to double down while the risk of decline makes sense for a non-dominant player to exit.
By making this purchase, HP gets a number of other interesting things. They gain Samsung’s related 6,500 patent pool which includes some powerful performance enhancements, Samsung’s copier business, and better access to Asian markets. This adds significantly to HP’s position while Samsung doesn’t really lose much because there is little synergy between Samsung’s printer business and other product offerings. And Samsung potentially gets a stronger customer in HP for their component and processor businesses.
Wrapping Up: HP Is About To Kick Printers Up A Notch
This all means that HP is about to kick printers up a notch as they integrate the technology they have acquired from Samsung and take an even firmer control over supplies than they currently have worldwide. Tablets continue on a decline, suggesting that printer declines could further slow, making this, potentially, an incredibly lucrative deal for HP while still being a good time for Samsung to exit because they seriously need to focus on their smartphone business at the moment.
So HP’s acquisition of Samsung’s business isn’t crazy; it is crazy smart. Go figure?!?