Despite a void in consumer awareness about the availability and viability of compatible and remanufactured cartridges that is largely due to a lack of third-party vendor marketing funds, non-OEM cartridges suppliers have been steadily gaining market share thus eroding the OEMs’ lucrative printing consumables business.
Market demand for compatible and remanufactured cartridges has largely been driven by price as small office/home office (SOHO) and small to medium enterprise (SME) customers seek out more cost-effective alternatives to expensive OEM printing consumables.
Managing director of Australian compatible cartridge vendor Calidad, Robin Kenyon, said consumers could save up to 80 per cent over OEM products by using Calidad’s refiller kits to refill their OEM cartridges.
“Consumers can also save up to 50 per cent by buying new Calidad alternative cartridges instead of OEM cartridges,” Kenyon said. The benefits to the environment in using recycled, remanufactured cartridges have also been a major driver behind the non-OEM cartridge market. And while OEMs cannot compete with third-party vendors on price, they are making significant investments in promoting their own environmentally friendly approach to cartridge recycling.
OEMs are now being forced to add to the value proposition for both resellers and consumers by providing a recycling service, and — in some cases — a remanufacturing service. In doing so, they are also buying themselves environmental credits and ensuring they stay in contention for lucrative government supply contracts, in which recycling of products is not just a politically correct culture, but a key budgetary consideration.
Brother, Canon, HP, Lexmark, Epson and Panasonic have recently put their money behind the Cartridges 4 Planet Ark recycling initiative. The aim of the cartridge-collection program is to encourage the recycling of all types of printer toner and ink cartridges and keep them out of landfill. As part of the program, customers can return their empty printer cartridges to any participating Australia Post outlet or Harvey Norman store. These cartridges are then 100 per cent recycled.
The Achilles heel of the non-OEM cartridge market is a lack of marketing dollars. Confusion reigns in consumerland about the ramifications of using non-OEM cartridges which have been perpetuated by the third-party vendors’ inability to sufficiently educate end users about their products, as well as by the OEMs that are continually warning consumers about the dangers associated with using non-OEM cartridges.
Using images of damaged printer components and the results of comparative testing of non-OEM and OEM cartridges as part of their marketing campaigns, OEMs like Epson are making cost-conscious end users think twice before buying a non-OEM cartridge.
While there are a large number of non-OEM cartridges on the market that are markedly inferior to OEM cartridges, managing director of Ausjet Supplies and Services, Dermot Murtagh, said there were many remanufactured and compatible cartridges that are just as good — if not better than — OEM products.
“The performance of remanufactured cartridges has improved dramatically over the last 12 months,” Murtagh said. “There are obviously a large number of cartridges available that simply do not match the performance of OEM cartridges and, indeed, some that may damage a printer. But non-OEM suppliers like us simply cannot risk the reputation of our business by supplying such products.”
He said that the majority of importers and distributors conducted extensive testing of the inks and cartridges they supply.
“We recently did extensive tests on 300 remanufactured cartridges and chose to supply only one range of cartridges by Procolour which are as good as the OEMs’ cartridges, as far as we’re concerned,” Murtagh said. “Currently, these cartridges are running at a failure rate of 0.0014 per cent.
“Resellers intending to sell non-OEM cartridges have got to do their homework, find out what kinds of tests its distributors have carried out and how frequently.”
Another misconception held by both resellers and end users was that the use of compatible cartridges will void printer warranties.
“I went to a well-known printer retailer and provocatively asked about using compatible cartridges on my printer and was told I could do that but it would void the warranty on the printer,” Calidad’s Kenyon said. “This, of course, is not just incorrect, it’s illegal. Aside from being misinformed by resellers, I think a lot of consumers just assume it. Under Australian law, a warranty is written in blood, you can’t void it.
“If a printer is damaged by a third-party cartridge, then the consumer, or in many cases the third party vendor, must pay for the repair of printer in that instance. The printer warranty still stands. The salesperson must prove to the consumer that the damage was indeed caused by the third-party cartridge.
“We offer customers a double warranty on our products, which covers the replacement of a faulty cartridge, and the repair of the customer’s printer if the cartridge damages it,” Kenyon said.
The third-party vendors’ lack of marketing firepower coupled with the OEMs’ aggressive marketing campaigns aimed at winning back market share from the aftermarket had contributed to a decline in the non-OEMs’ market share, IDC analyst, Katina Goussetis, said.
She said that inkjet compatibles steadily lost market share in 2002, dropping from 20.6 per cent of the market in Q1 2002 to 17.5 per cent in Q4 2002. Laser toner compatibles also lost ground holding 39 per cent of the market in Q1 2002 and dropping to 36 per cent in Q4 2002.
“This decline can largely be attributed to the OEM’s various reseller and end-user incentives being offered by OEMs as well as the results of aggressive OEM marketing campaigns, such as Epson’s “Demand genuine only” promotion,” Goussetis said. “Education from the likes of Epson has made many end users think twice before putting a compatible product into their machine. On the other hand the compatibles market share in these areas still remains considerable. This is made up of those end users who weren’t even aware of compatible consumables being an option until all the fuss in the media.”
However OEM’s anti-aftermarket marketing campaigns are nothing new. “The OEMs get over-anxious about this whole [printing consumables] subject. They should be focusing their marketing efforts more on selling their printers and making them easier to use. The compatibles market is a lot smaller than what vendors think. The real problem for OEMs is not the compatibles but counterfeit products. They would be eating much more of their business than compatibles.”
Perhaps the most effective weapon OEMs have developed to protect their lucrative consumables market is not marketing clout, but rather the technology itself.
Over the past two years, OEMs have been developing chips, polymerised toners, specialised components and impregnable cartridge designs that are making it increasingly difficult for third-party vendors to reverse engineer compatible products.
As compatible and remanufactured cartridge makers spend millions of dollars on R&D and new production facilities on developing new component technology dictated by new OEM designs, there is increasing concern about the use of copyrighting laws by OEMs.
In December 2002, Lexmark filed a lawsuit in the US to prevent toner cartridge remanufacturer Static Control Components (SCC) from manufacturing the Smartek chip that performs the same role as Lexmark’s chip in warning users when printer toner levels are low.
Lexmark accused SCC of violating the Digital Millennium Copyright Act, the controversial 1998 law established to prevent piracy. Lexmark won the first round in a February 27 ruling by a US District Court in Kentucky. The judge issued a preliminary injunction that bars SCC from making the chips used in replacement cartridges for two of Lexmark’s laser printers.
The same day SCC filed an antitrust lawsuit against Lexmark which is still pending, charging the manufacturer with attempting to monopolise the printer market.
The case has potentially broad implications. The DMCA was aimed at music and motion pictures, but critics have said Lexmark’s use of it illustrates a broader problem.
Under the DMCA, it’s conceivable, for instance, that a hardware maker could prevent interoperability with other systems by citing the law’s anti-circumvention provisions. By putting software controls on, for instance, auto parts, OEMs can use the law to stop remanufacturing of parts in that industry.
SCC’s CEO, Ed Swartz, said in a company statement that “Static Control has engaged in legitimate reverse engineering that is expressly permissible under both the Copyright Act and the DCMA.
“Lexmark is attempting to use both the Copyright Law and the Digital Millennium Copyright Act of 1998 as grounds to eliminate all competition from their toner cartridge markets. If Lexmark could be successful in this misuse of copyright law, the consequences to our industry would be significant and reach beyond just our ability to fairly pursue Lexmark cartridge markets.”
However, Lexmark argues that rather than restrict aftermarket competition, the vendor specifically facilitates it by offering a regular cartridge that non-OEMs are free to remanufacture.
Managing Director of Lexmark Australia and New Zealand, Henrik Stensfeldt, said: “Lexmark is committed to the protection of its intellectual property rights in trademarks, designs and patents, and to its Prebate licensing programs.”
Regardless of the outcome of the SCC countersuit, non-OEM cartridge vendors still have the opportunity to supply Lexmark-compatible cartridges. The chips on Lexmark toner cartridges are present on regular cartridges as well as its discounted Lexmark Cartridge Collection Program (LCCP) return cartridge. Only on the LCCP cartridge, which the customer voluntarily purchased at a discount in exchange for the agreement that it only be returned to Lexmark, does the chip enforce this customer agreement.
“Customers and remanufacturers are free to purchase the regular cartridge which can be remanufactured by anyone,” Stensfeldt said. “Our discounted LCCP cartridge helps Lexmark retrieve the empty cartridges so that we can remanufacture and recycle them ourselves. I can’t comment on the practices of third-party remanufacturers, but they have every opportunity to acquire our general-use — or non-discounted — cartridges.”
The remanfacturing community is becoming increasingly concerned about OEMs spending millions of dollars ramping up the technology in their cartridges so that non-OEMs with limited R&D budgets cannot keep up as the reverse engineering of the cartridges becomes a far more complex process.
“The past two years have been a time of unprecedented change in our industry,” Swartz said. “The OEMs have clearly emerged as our ultimate competitors who have declared war on our industry. The OEMs will continue to escalate their technologies to erect barrier after barrier to our industry. Each barrier will require an ever growing amount of time, money, talent and effort to overcome.
“This escalation of technology is changing the dynamics of the market as the cost of supporting our industry’s increasing technology requirements sets in. All of us are attempting to understand just what is an appropriate course of action.”
Despite Lexmark’s win in the first court hearing, many industry players say that Lexmark will lose the second round.
“What they’re trying to do is what a lot of automotive manufacturers tried to do 30 odd years ago — stop people making compatible parts,” Murtagh said. “You can’t force people to buy a car and then buy the petrol from your pump. Most countries have laws that discriminate against people who do this. Lexmark have bent the rules here. Even HP has said that they’re wrong. They’re abusing that particular law [DMCA].”
A number of industry pundits believe that ultimately the injunction against SCC will be overturned.
“What [Lexmark] are doing in the meantime is slowing up the remanufacturing industry, they’re slowing up Static Control and will try to keep them in court for as long as they can,” Murtagh said.
IDG News Service Sources were used in this feature.
According to market research company IDC, the printer consumables market totalled 3,524,208 units in Q4 2002, growing by close to 6 per cent on Q3 2002 figures. This total figure is inclusive of both original and compatible inkjet cartridges, refills, laser toners and serial-dot matrix ribbons.
The growth was mainly driven by the OEM vendors who increased initiatives such as end-user promotions and stronger channel engagement in a bid to combat losing market share to compatible players.
The ink cartridge market, in particular grew by 9.8 per cent to 2,689,071 total units between Q3 2002 and Q4 2002, as a result of the various promotions. Laser toners declined by 6.9 per cent quarter-on-quarter to 690,474. This was the result of the impact of the Christmas holiday period and minimal incentive schemes in this area.
IDC analyst, Katina Goussetis, said a year-on-year comparison revealed that the although there was growth quarter-on-quarter, the market saw a decline of 1.1 per cent to 13,588,584 units in 2002. Apart from a slower economy, according to feedback from the channel this 2002 decline was also the result of the active gray and counterfeit market activities in Australia.
Goussetis also said that, despite the downturn in yearly figures, the printer consumables market is expected to grow in 2003 with the continued assistance of promotional activities by the OEMs. Additionally, growing related markets such as the multifunction and photo printers will also become a driving force of the printer consumables market.