As the economic expansion settled down to a more sustainable rate in 2005, the printing industry experienced a year of adjustment. Although overall print demand may decelerate in 2006, the outlook for the digital segment is continued double-digit growth.
After a remarkable rebound in 2004, the printing industry continued to grow in the early months of 2005, propelled by economic expansion. However, the recovery slowed as the year progressed. According to the U.S. Department of Commerce, real (inflation-adjusted) gross domestic product (GDP) grew at an annualized rate of 3.8 percent, 3.3 percent, and 3.8 percent in each of the first three quarters. Although the hurricane disasters of 2005 were expected to dampen growth prospects in the fourth quarter, the consensus among leading economists was that the GDP would rise 3.5 percent over the year, compared with 4.2 percent in 2004.
A 3.5 percent expansion is still healthy, since the average annual growth rate in GDP since 1990 has been only three percent. But the sensitivity of print demand to last year’s economic deceleration was striking. In October 2005, the National Association for Printing Leadership (NAPL) forecast that commercial printing sales would rise no more than 2.5 percent in 2005, compared with an actual increase of 3.5 percent in 2004. Since digital printing competes for a share of the overall print market, it is not surprising that there were signs of a slowdown in the digital segment as well.
A Year of Adjustment
Although suppliers cited brisk activity at last year’s AIIM/ON DEMAND and PRINT05 tradeshows as indicators that the momentum of 2004 was not diminished in 2005, there were several signs that the digital printing industry had settled down, at least for the moment.
In contrast to the parade of new products in previous years, there were no major high-end digital press launches in 2005. It has been nearly five years since Kodak and Heidelberg launched the NexPress 2100, three years since Xerox launched the DocuColor iGen3, two years since Hewlett-Packard (HP) announced the Indigo Press 5000 and Press w3200, and two years since Punch Graphix International introduced the Xeikon 5000. On the monochrome side, Océ launched its VarioStream 9000 line nearly two years ago, but the company has yet to introduce a full-color version.
A number of vendors made incremental improvements to their existing products in 2005. Océ announced a twin tandem version of its CPS900 digital color press, a 60-impression-per-minute (imp/min) configuration targeted at the midrange production printing segment. In order to remain competitive in the high-speed digital color press category, Kodak announced that the throughput of its NexPress engine would increase to 83 imps/min early in 2006. Meanwhile, Xerox boosted the rated speed of the DocuColor iGen3 to 110 imps/min, and HP announced the Indigo Press w3250, an upgrade to its 136-imp/min Press w3200. Several manufacturers also introduced enhanced feeding and finishing capabilities for their existing equipment. However, in 2005 there was none of the excitement that accompanied the major new product launches of previous years.
If digital printing is to capture a significant chunk of the commercial print market, print providers will need fully integrated, end-to-end workflow management solutions that encompass not only order entry, digital prepress, and digital printing, but all of the operations required to turn an order into a shipped product and an invoice. Otherwise, transaction management costs can eat up most of the profit on short runs. After the last round of press launches several years ago, some vendors were hopeful that a new family of workflow products could be developed to address this requirement. But they had another big motivation to push workflow—they needed a stream of new products to sell. Since the development cycle for a major new digital press is several years and the R&D investment can range in the tens to hundreds of millions of dollars, it would be several more years before the next wave of digital printing technologies was ready for the market.
In 2003, workflow became the buzz at the AIIM/ON DEMAND and GRAPH EXPO tradeshows, as scores of companies outlined elaborate plans to wire up the printing industry, using Job Definition Format (JDF), a complex, embryonic protocol that showed great promise of mutating into myriad varieties in the hands of competing vendors. In the years since those heady days of hope and hype, some useful progress has been made in offset prepress workflow. However, for digital printing, the improvements have been underwhelming. Except for some modularization and updating to bring older products into JDF compliance, the current crop of digital print workflow systems is remarkably similar to the range of products existing three years ago.
The major digital print vendors were quieter about workflow in 2005. Meanwhile, as print providers invest in high-priced, high-capacity production equipment, the need for end-to-end workflow is becoming—for lack of a better word—more pressing.
For the most part, digital press vendors have been eager to publish statistics on their installed base of products, at least when the news has been favorable. Over the years, Xerox, in particular, has disclosed the number of units sold in the major product categories that it has dominated, ranging from the DocuTech to the mid-range DocuColor line. In the first two years following the launch of the NexPress 2100, Heidelberg and Kodak gave periodic updates on the number of units sold. Occasionally HP and Punch have also shared some data on the installed base of Indigo and Xeikon presses, respectively.
In the context of this tradition, last year’s silence among the vendors was significant. At the end of 2003 Xerox announced that it had installed 100 DocuColor iGen3 presses in the first year after launch and confidently forecasted that it would install 400 to 500 more in 2004. However, last year the company did not proclaim victory on that projection and declined to say how many of its flagship presses had been sold. Although Xerox asserted that it no longer wanted to get into the numbers game with competitors, another possible reason for its silence was that the market softened last year. As the bellwether for the digital printing industry, Xerox’s fortunes were probably no worse than those of the other major vendors, all of whom were unusually quiet.
The pulse of the digital printing market can also be measured in the investor community. Wall Street’s assessment of the industry is based on bottom-line profitability and cash flow, as reflected in the stock prices of the major participants.
Digital printing is a primary driver in the business of four publicly traded companies. It is the core business of Xerox and Océ. It accounts for nearly one-third of the revenue and two-thirds of the profit in HP. Although these companies compete in the office, they all have major stakes in production printing as well. Kodak has invested heavily in digital and conventional production printing systems and software businesses as a hedge against the decline in its core photographic film operations.
Financially, 2005 was a difficult year for this group. While the share price of Xerox outperformed the Dow Jones Industrial Index (DJIA) at the end of 2004, it settled back to parity in mid 2005 after the company reported that it missed its earnings targets in the first half of the year. Océ, the other purely digital player in the group, did not fare as well as Xerox. Its stock declined about ten percent with respect to the Dow over the past two years. Although HP appeared to be recovering under new management at the end of 2005, over the previous two years its share price had been hammered by difficulties in the cutthroat personal computer business. Kodak’s investments in the graphics sector were cause for some optimism at the end of 2004, but as 2005 wore on, it became apparent that these new operations were not yet able to buoy up the company against swift downdrafts in its photographic film business.
Analysis and Forecast
All these signs pointed to a deceleration in the growth of digital production printing in 2005. In fact, on the basis of preliminary data through the third quarter, Strategies on Demand projected that digital print volume rose by 16 percent for the year — not as much as anticipated in last year’s forecast, but certainly a healthy growth rate in an industry facing only two percent to three percent growth in overall demand for print.
Over the past two years of capital investment across the industry, the installed base of digital presses has been populated with a larger share of machines capable of delivering higher productivity and higher capacity at lower printing costs. Because of the high elasticity of demand for digital printing in the publication and commercial print marketplace, these presses are poised to capture a significantly larger share of volume currently directed to conventional printing technologies. However, since digital printing is an annuity business, the time required to fill these new presses can extend beyond a year. In 2005, the market was still absorbing some of this capacity. Meanwhile, the slowing growth rate in overall print demand in the first half of the year caused a temporary pause in further investment.
At the beginning of this New Year, the capacity situation appears to be resolving itself. Barring a major economic downturn, digital production will accelerate as the technology takes more volume from offset. Strategies on Demand L.L.C. projects that digital publication and commercial print volume will increase at a 16 percent compound annual growth rate (CAGR) through 2010.
Digital printing has a lot more room to grow, especially in the color segment. The annual output from digital color production presses is still quite small — 44 billion impressions in 2005. As shown in the upper graph to the right, digital color production is just now rising to the levels that digital monochrome printing attained about ten years earlier.
The lower S-shaped curve in the adjacent figure is frequently used to depict the life cycle of a product or technology. This experience curve, as it is properly called, is a representation of the cumulative output of the product from its inception to any particular time in its life cycle. In terms of cumulative print volume, digital color is at the base of the experience curve, while digital monochrome is climbing the slope.
The annual output of monochrome will level off by the end of the decade, as color takes on a greater share of total print volume. At that point, the current digital monochrome printing technology will pass the midpoint of the experience curve and enter the mature phase.
In conclusion, 2005 should be viewed as an intermission during which the market made some adjustments to accommodate the rapid growth in digital press capacity in an economy that was settling back to a more sustainable expansion rate. Although the outlook for conventional printing remains guarded, 2006 should be a solid growth year for digital print providers and their suppliers.