Friday, October 12, 2007

Observations: How Big is Big?

How Big is Big?

The inspiration for this month's column comes from a like-minded friend and industry colleague who enjoys questioning basic concepts that most of us take for granted. In this case, the question centers on industry numbers that get bandied about all the time and, more often than not, with little thought about what they really mean.

In general, the same cannot be said for our personal lives. For example, $2 is a high price to pay for a basic cup of coffee, and at $3 a gallon, the price of gasoline is sky high. But what about on the business side? The world of ink jet supplies, where consumers and business purchasers blend, is a plausible bridge to that question.

While attending the Lyra World Expo preshow conference in August (see the October 2007 Hard Copy Observer for further coverage), I observed that much of the discussion on trends in supplies pricing involved the purchase price of cartridges, with sub-$20 price points becoming popular among OEMs and third-party companies. Even with a reduced quantity of ink, the broader view of cost per page (CPP) seems to be taking a back seat to the lower entry price. I maintain that this phenomenon is because people can relate to the out-of-pocket cost much more easily.

That example grounds us on prices, which we can begin to relate to our personal cash flow. Then we can blow up some of these numbers to see how they fit with the very most macro of numbers in our business. At the Lyra preshow conference (see "Lyra Industry Experts Speak"), analysts presented that the crossover point between hardware revenue and supplies revenue (ink and toner) occurred in 2005, when revenue from each group was just below $60 billion. Using that as a starting point, assuming that half the supplies revenue is from sales of ink jet cartridges, and estimating a weighted average selling price of $20 a cartridge, we get a unit total of 1.5 billion cartridges shipped in 2005. In terms of toner, $30 billion in toner cartridges, at $100 each, infers 300 million units shipped annually.

It is tempting to want to go on and extrapolate using an active installed base of 500 million ink jet printers (1 printer for every 12 individuals on the planet) and an installed base of 200 million laser printers (which I got from knowing HP (NYSE HPQ) just shipped its 100 millionth unit more than a year ago). But we had better stop right there. At this point, a number of issues, such as how many cartridges per ink jet device and color versus monochrome laser machines, really need to be modeled separately. This is a good example of why the spreadsheet was invented. As we leave the back of the envelope, we start to add necessary richness and complexity.

I have not validated the numbers that go into my assumptions with "official" sources like Lyra Research, the publisher of this newsletter, but they seem to make sense. One danger, of course, is piling bad assumptions on top of more bad assumptions and ending up an order of magnitude or two off from the "real" number but, more often than not, the assumptions tend to balance each other out.

Printers and cartridges inevitably lead to pages, and that topic is really for another column. But just to put a toe into the water, HP has been making hay with its "paper pie" for a long time. In October 1997, the firm’s entire annual pie for the United States totaled 12 trillion pages, and pages produced on digital printers accounted for 3 percent. Fast forward to more recent years, when HP executives have talked about a worldwide annual page count of 46 trillion pages in 2006, growing to 54 trillion pages in 2010 (Observer, 9/05). These numbers seem a lot more enticing. Taking the $60 billion supplies revenue number and dividing by 3 cents per page give us 1.8 trillion pages. (These are from products that Lyra categorizes from sub-$100 ink jet printers to low-end typesetters and copiers.) If we accept HP's current page estimates, that puts digital pages at just under 4 percent of the market. While 3 cents per page may be woefully inadequate as an average, that figure gets us in the ballpark.

We can use this same type of analysis to look at big numbers that are not related to products. For example, in my September column, I commented on HP's $300 million marketing campaign touting its "Print 2.0" message. While that figure seems large, if we compare it to the approximately $30 billion in annual revenue from HP's Imaging and Printing Group, $300 million is "only" 1 percent of the unit's top line. The most talked-about metric in television advertising, at least among laypeople, is the cost of an advertisement spot during the Super Bowl. The price has recently passed $2.5 million for a 30-second spot, so picture this: at that price, HP's $300 million budget would buy one full hour of Super Bowl advertising (120 spots).

We have only scratched the surface on this topic, so I would like to revisit here from time to time. I am a big proponent of "back of the envelope" figuring and knowing some key benchmark numbers can really be a big assist. Some of those I would suggest include the one-million-a-week printer shipment level that HP reached a couple of years back, the aforementioned 100 million LaserJet installed base, the 50:50 split reached a couple of years ago between hardware and supplies, HP's just-under $30 billion in revenues, and likewise, HP's 50-percent share position in many of its markets.

Creating easily-visualized images is of great help, too. I remember that when the HP LaserJet hit sales of one million units in the late 1980s, a very creative management colleague chose to make it real by expressing that milestone to the local media as follows: take your local 25,000-seat football stadium, and put a LaserJet printer in each and every seat. Now stack 39 more of those printers on each seat, and you have 1 million printers. When HP hit its 100-millionth LaserJet shipped in 2006, one could expand the visual by imagining 99 more of those stadiums.

As much as I enjoy this kind of mental exercise and am a proponent of its usefulness in business, things can change, just like in everything else. In a recent class I was teaching, I described a hypothetical analytical problem to my graduate marketing students, and asked how they would solve it. Without hesitating, one of my eager students raised a hand and shouted out "Google!"

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