Eastman Kodak (EK) stock has been a value trap for years as increased sales of low margin digital photo products have struggled to make up the cash flow lost from declining traditional film sales. The next step in Kodak's digital reinvention is aimed directly at Hewlett Packard (HPQ) and Lexmark (LXK). The company has unveiled its own line of inkjet printers complete with their own ink cartridges.
How does Kodak think it can compete with the established big guys in the printer market? By changing the rules of the game. For years, the hardware companies sacrificed margins on their printing hardware in order to secure the bulk of their profits from overpriced ink cartridges. Think of it as the Gillette business model. Get everyone using your razors and make your money selling replacement blades.
Kodak is going to try and take a slightly different approach, since low-priced ink recycling stores have popped up everywhere, aimed at customers frustrated by paying $30 for a plastic container of ink. Kodak will price their printers slightly above average, but simultaneously is slashing the prices of their replacement ink. Black cartridges will fetch $10, with color versions costing $15 apiece.
Will this strategy work? Well, it's hard to say. Ink cartridge prices will most likely fall even further but that trend has already been in motion ever since ink recycling retailers like Cartridge World have gone ahead with rapid nationwide expansion plans. As a result, it is definitely bad news for HP and Lexmark, who will have to either lower prices to maintain market share, or give up some share to preserve profit margins.
But is this lightning in a bottle for Kodak? I'm not convinced yet, until I see what kind of margins the company can really get from this strategy. Hardware prices are always under pressure, so how long will Kodak be able to price their printers at the high end of the market, and how long will those prices hold? Will the total margin on a $250 printer and a $10 cartridge for a new entrant into the market be meaningfully higher than that of a $200 printer and a $30 cartridge from a company like HP that already possesses a low-cost production process?
It is surely a bold move from Kodak, and one they needed to make to reinvigorate their company and really take aim at a large consumer complaint; the high price of ink. However, even if they can take a nice chunk of the home printing market, it remains to be seen how much of that ink will really flow through to their bottom line. And that is really what will be important for Kodak investors going forward.
Full Disclosure: No position in EK, HPQ, or LXK at time of writing