Why do ink cartridges cost so much?

At US$22 per quarter-ounce, a Hewlett-Packard colour ink-jet cartridge is more expensive, by weight, than imported Russian caviar.

Observing such high prices, Connecticut research consultant Zel Dolinsky wants to know the reasons for them. "How come, with printer prices falling, ink prices are still so outrageous?" Dolinsky asks. "I'm appalled."

Ink jet and toner cartridges are fanning angry sparks in the ink cartridge replacement market--a $21 billion field, according to Lyra Research.

Consumers are annoyed at the price of authorized replacement ink cartridges, and tempted by third-party substitutes that don't always work flawlessly.

The major vendors, including Canon Inc., Epson America Inc., Hewlett-Packard Co., and Lexmark International Inc., are at odds with independent manufacturers of alternative inks. In fact, some big vendors are suing third-party makers of cartridge clones for alleged patent violations. Meanwhile, second-tier ink cartridge makers say they simply offer consumers a choice--at prices that are sometimes 75 percent below what major vendors charge.

That leaves consumers in printout purgatory. They must either pony up for name-brand ink, or risk substandard printouts by buying replacement ink jet cartridges from a generic distributor. As PC World has found, however, plenty of worthy third-party replacement ink jets are also available.

The big-name vendors say that the third-party ink is inferior to brand-name versions. And certainly, the brands dominate; together, Canon, Epson, HP, and Lexmark account for 84 percent of the ink replacement market, Lyra Research reports.

Recently, the controversy has caught the attention of overseas regulators. Trustbusters in the United Kingdom and at the European Union are examining the way Canon, Epson, HP, and Lexmark price ink and do business. In the United States, at least one state is attempting to protect consumers' right to purchase third-party alternative goods.

The Real Cost

The printer supplies industry has adopted the practice of cell phone and razor blade sellers: Charge low prices for initial equipment, then make money from ongoing fees for additional needed components. Vendors sell consumer printers at cost, or even sometimes at a 20 percent loss, say financial analysts at Bear Sterns who track Epson and HP. But on the flip side, both firms earn a 60 percent gross margin on ink jet and toner cartridges, says Bill Hand, financial analyst with Bear and Stearns.

Those numbers are not exactly true, the vendors say. HP does make money on its printer hardware, according to Pradeep Jotwani, senior vice president of imaging supplies. In a prepared statement, Epson says that it "makes a reasonable profit on both" printer hardware and ink.

Still, consumers grouse about the "give away the razor and sell the blades" business model. Hence, the birth of a market for recyclers to refill used cartridges, or sell cartridge clones at half the price of the brand-name items.

Protecting Profits

Not surprisingly, printer vendors characterize this aftermarket as a financial threat, Hand says. "It's fair to say at least 80 percent of overall profits (from within Epson's and HP's printing divisions) come from supplies," he says.

Lexmark has tried to suppress the makers of aftermarket cartridges by integrating a microchip, dubbed a "killer chip," inside its own laser jet toner cartridges. If a Lexmark printer doesn't spot the Lexmark chip inside a cartridge, the unit won't work. The only way to reuse the cartridge is by sending it back to Lexmark, which will refill the empty tank and reset the microchip for another use.

If you try to refill the Lexmark toner cartridge yourself with third-party toner, or if you use a compatible cartridge that lacks the microchip, the printer won't accept it. The microchip and Lexmark printers have the intelligence to "expire" toner cartridges and use only Lexmark goods. Critics worry that it's only a matter of time before Lexmark introduces the chip to its ink jet product family.

Epson integrates chips to authenticate its cartridges, too, but it takes a slightly less extreme approach: You can reuse its ink jet cartridges by refilling them. But a used Epson microchip and cartridge lose some functions, such as the ability to record ink levels.

Down the Inkwell

Caught in the middle, many consumers remain angry about the high cost of ink.

"I know they're in the business of making money, but sometimes you can go too far," Dolinsky says of the recurring ink jet cartridge costs associated with his US$150 HP DeskJet.

Predictably, HP and others say their cartridge prices aren't high considering the cost of researching and developing the technology and then manufacturing the equipment. "These aren't just bottles of ink you put inside of your printer," Jotwani says.

He points out that HP's ink jet cartridges are very sophisticated. For example, each has 40 microscopic nozzles that precisely expel billions of ink dots across a page. HP is also fastidiously attentive to ink quality, Jotwani says, to assure uniform viscosity and colour.

Calling ink prices high may largely be a matter of perspective, some analysts say. When printers cost $500, no one complained about $30 ink jet cartridges, says John Shane, CAP Ventures analyst. But since 1996, the average cost of a personal ink jet printer has dropped by 60 percent, according to CAP Ventures, from approximately $426 to an average of $169 in 2002. Meanwhile, CAP Ventures also reports, the average price per printed page has risen by 12.5 percent, from 8 cents per page to 9 cents per page, in the same timeframe.

CAP Ventures says that it doesn't count the cost of the printer itself in figuring prices per page; it's based largely on the cost of cartridges. The analysts attribute the higher per-page costs largely to the fact that the average page printed today contains more cartridge-draining graphics and images than even a couple years ago.

Ink Angst Goes Global

High ink jet prices among dominant ink manufacturers have caught the attention of U.K. and European Union regulators.

Following a year-long investigation, a U.K. agency called the Office of Fair Trade (OFT) has recommended that Canon, Epson, HP, and Lexmark more clearly tell consumers their likely long-term printing costs. Printer makers have until October 2003 to better communicate the total cost of printer ownership, after which they face possible OFT monetary fines.

In December 2002, the European Union launched a similar investigation. "We are evaluating barriers to entry into this market, prices, and contracts that lock businesses into long-term relationships with OEM ink makers," says Tilman Lueder, European Union spokesperson.

Both investigations stem from consumer price complaints. Overseas regulators say that the gripes also came from remanufacturers and generic vendors, who claim that Epson and Lexmark are making it very hard to make compatible aftermarket clones.

The Law and Lexmark

Lexmark is challenging the third parties in court. Last December, the printer vendor sued North Carolina-based Static Control Components, which makes and sells clones of Lexmark's microchips to recyclers.

Lexmark is accusing Static Control of contravening the Digital Millennium Copyright Act, which makes it illegal to circumvent any digital technology used by a company to protect its intellectual property.

Many Lexmark buyers agree to return the cartridges to Lexmark in exchange for a rebate. This enables Lexmark to limit competition in the aftermarket, say analysts. A judge in Lexmark's home state of Kentucky has ruled in favor of Lexmark; and for now, Static Control is forced to put its microchips on ice.

Consumer Rights Rally

A twist to the Static Control case came on August 7, when North Carolina Governor Mike Easley signed into law a bill giving North Carolina residents the right to refill any ink jet or toner cartridge. The law doesn't directly address Lexmark's DMCA concerns, but it bolsters buyers' rights.

Under the North Carolina law, consumers and businesses that have contracts with service agents can refill or use third-party cartridges despite printer manufacturers' user agreements requiring consumers to use only the vendors' ink. The bill does not address warranty issues.

European regulators are considering a law to ban printer and cartridge manufacturers from using Lexmark-style "killer" chips that leave expended cartridges unusable. The EU claims that the use of such chips just loads landfills with empty cartridges.

Lexmark declined comment for this report. But the public will likely be hearing a lot more about the cost of printing. Spending in U.S. retail stores on toner and ink jet cartridges is forecast to jump 43 percent by 2007, to $26.3 billion, according to Cap Ventures.

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Tom Spring

IDG News Service
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