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Capitalism in Digital Printing

Both New and Old Concepts are Alive

By Steve Aranoff & Robert FitzPatrick

The 2005 SGIA Digital Expo in Phoenix was a show with none of the traditional screen print products, but only the new generation of digital suppliers and buyers. Post-show, it is interesting to compare and contrast the state of the growing digital printing market with a recent book published by Harold Bogle on the pathological mutation, or radicalization, of capitalism.

Bogle, the founder of Vanguard Mutual Funds, is a well-respected member of the Wall Street community, and an unlikely person to present such an analysis. The Battle for the Soul of Capitalism is an important treatise in general for the investing public, but also has merit specifically to the world of Digital Output readers.

The Bogle thesis is fairly simple. Capitalism (Owners Capitalism) is generally defined as an open market whereby owners (the ones who put up the capital) of businesses work hard to succeed and grow, and reap the financial rewards for their efforts. Bogle argues that this concept has been mostly lost to a new business model, Managers Capitalism, in which there is massive discontinuity between those who own the companies for long term growth—the traditional stockholders—to the short term owner speculators, and those who manage the businesses both at the top and in the ranks of middle management. He notes, "With power moving away from owners of securities, this new system has been led afoul by grossly excessive executive compensation and stock options, part of an enormous transfer of wealth from public investors to the hands of business leaders, corporate insiders, and financial intermediaries."

Among these parties of influence, there are now three common situations in today’s big business that are in direct opposition to the old concept of capitalism. Speculation, rather than Long Term Growth, promotes more earnings from stock ownership; Professional Management, rather than Management by the Owners, puts decision making outside of the risk capital model; and Preservation of Jobs rather than ensuring the growth of the business, seems to be the style of Middle Management Personnel.

Speculation, Rather than Long Term Growth
In today’s world, the concept of investing and managing a business for the long term is no longer the advisable way to grow wealth. Those who do buy solid companies for the long haul are up against those who invest primarily based upon short term speculation on the price of a company stock, including those who manipulate stock price for short term financial gain. Since the stock market seems to reward short term performance, and hence short term owners, rather than to promote business stability and moderate growth, more and more investing decisions are made for short term gain. These are enhanced by similar forces from within the corporation, as will be discussed further in the following two concepts. Readers may also remember Al Dunlap, former CEO of Sunbeam Corporation, who earned his notorious sobriquet for his knack of downsizing payroll to downsize company costs. Chainsaw Al, who once made a fortune cutting costs at Sunbeam, eventually put the company into bankruptcy, rather than saving it.

Professional Management, Rather than Management by the Owners
Rather than being both owner and responsible manager for a firm, those who are paid professionally to manage may no longer have any long term financial ownership in the firms that they manage. In fact, their compensation plan is primarily based upon fostering short term profit growth, and their employee stock ownership opportunities are constricted to the short term. For example, stock options generally require a price increase during their period of work, or the purchase opportunity is lost. This causes many senior managers to make decisions that favor short term results. Thus, increasing their personal ability to cash out profitably from their stock options and to potentially conflict with the long term interests of the business. In the old capitalism model, businesses were grown for the long term, sometimes operating successfully for generations, not to profit next week. The Enron and Tyco debacles are good examples of the abuse of power that takes place in such situations.

Preservation of Specific Jobs, Rather than Growth of the Business by Middle Management Personnel
In the old model, middle management was part of the company family. Their livelihood was based upon the long term success of the company. Today, many such managers no longer are required to oversee long term success. Their business decisions are based upon preservation of their job, their empire, or the meeting of artificial targets. Industry examples here are the Managers of the Technology Laboratories for two different industry icons who told us that they would never purchase a technology from outside because it would cost funds that would require them to let go a number of the scientists in their labs, diminishing their role in the company. As a consequence of these actions, opportunities are lost for growth and these companies seem quite willing to decimate their ranks to cut costs, as long as the old guard remains intact and the basic structure and mission are left untouched. After a few rounds of such behavior, not much is left to sustain the company’s future.

Back to the Battle
Moving from the semi academic to the current digital printing marketplace, as seen at SGIA, we do see pockets of concern with respect to Bogle’s analysis. Certainly, companies such as DuPont, EFI, Fuji, Kodak, and Screen have made great strides, but they have also brought with them many of the fallacies in the new capitalism model. For example, DuPont, having spent the last two years finishing development of their new Chinese-based line of wide format printers, has brought them to market through multiple dealers and VARs trying to promote growth quickly, rather than through building a strong long term channel that can support their efforts. As a result, three competing dealers from DuPont all made offers to the same customers and the end result appears to be a sale made based upon price. This may be good—in the short term—for the manufacturer and for the customer, but is damaging to the long term health of the channel. When the channel is weakened, ultimately the customer and manufacturer will also suffer. No owner manager would have made such decisions.

On the other hand, other independent manufacturers, such as Raster Graphics and Graphics One have brought out UV flatbed printers at significantly lower prices—under a thousand dollars. Putting their own fortunes on the line, they are risking their own livelihood, versus that of non-involved investors.

Even more interesting, however, is our non-scientific view of the buyers—printers—analyzing their purchase opportunities at the SGIA Digital Expo.

Most of these were relatively small companies looking to start new business ventures to enhance their long term growth. Most had their own funds or guarantees tied up in their purchase decisions, and this came with significant personal risk. They were key managers in their companies, involved in their customer relationships and with hands on knowledge of the new print products that they could sell to their market/customers. Some of them would be running the equipment purchased and wanted to understand how it was going to add opportunity or make them more efficient in what they already did. The decisions that they made would significantly affect the success of their companies.

This is not to say that there weren’t big businesses out looking for equipment, but because of the all-digital venue and the time of the year before the holidays, the buyers who wandered the aisles were much more typical of the entrepreneur than of the corporate manager. To us, this showed in a very public way that true capitalism is alive and well in the short run digital printing and specialty graphics end of the print market.

We don’t doubt that larger printers will eventually find their way into this growing market, and that more of the supply entrepreneurs will be purchased by larger public companies. However, it is encouraging to see that owner managers, who have a personal interest in their company, are still alive and well in the current digital print-for-pay marketplace.

We hope to see more businesses focus on long-term success rather than profit from short-term prosperity.

 Mar2006, Digital Output

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