The Battle Lines Have Been Sprayed
Color inkjet printers have gotten incredibly cheap over the last few years, but the ink cartridges needed to keep them running have not--and therein lies the seed of a fierce legal battle that could decide whether consumers’ total printing costs will go down.
On one side are the big companies that make cartridges to fit their own printers, namely Hewlett-Packard Co., Canon Inc. and Seiko’s Epson America unit. On the other is much smaller Nu-kote Holding Inc. of Dallas, which sells cartridges to fit those printers but at much lower prices.
The dispute: The big manufacturers allege Nu-kote is infringing their patents and trademarks and thus unlawfully slicing into their sales with its less-expensive cartridges. Nu-kote, in turn, alleges that HP and the others are using the courts and other means to thwart competition--thus keeping cartridge prices artificially high in violation of antitrust laws.
Nu-kote won a partial victory this spring when a federal judge in Los Angeles overturned several patents held by Seiko. But Seiko plans to appeal, Nu-kote has lost some other rounds in court, and there’s no day in sight when the entire issue will be resolved.
If the printer companies prevail, look for prices to stay about where they are for the foreseeable future, analysts said. If Nu-kote wins, its lawyer predicts a price war for inkjet cartridges.
“There would be a choice and prices would go down immediately,” said Ronald Katz, a San Francisco attorney representing Nu-kote. “People are now coming to an awareness of how much they pay for cartridges.”
That sounds appealing enough for consumers and businesses, which are expected to spend $4 billion on inkjet refills this year. But others argue that HP and the other printer makers are entitled to block low-price rivals if their patents are being violated, because they spent the millions of dollars to develop the technology and should be allowed to recoup their investment.
Nu-kote’s critics also contend that if the market is flooded with inexpensive off-brand cartridges, the consumer will be harmed anyway with inferior printing quality, and will end up blaming the printer manufacturers.
“If you get bad output from a printer because you put in inks that weren’t quite up to par, I would wager that a surprisingly large percentage of consumers would still blame the printer,” said Michael Weiss, president of MWA Consulting, a Palo Alto firm that specializes in printing and imaging.
Each day the stakes get higher. By year’s end, there will be roughly 40 million inkjet printers in use domestically, more than double the number just two years ago.
As the market has surged, prices for printers have tumbled--some to the point where the producers now sell them at little or no profit. So they rely on selling lots of refill cartridges to make their printer operations profitable and recapture their investment in developing the machines.
It’s a classic corporate strategy, whose best example is the virtual giving-away of shaving razors in order to sell lots of blades. Cameras and film are another example.
Printer refills, too, “have always been a key part of a printer company’s profitability,” said Robert Fennell, printer specialist at the research firm Dataquest in San Jose.
With inkjet printers, consumers typically use three to four cartridges per year, analysts estimate, and brand-name refills made by Canon and the others for their machines retail for between $20 and $35 apiece, depending on whether they contain color ink or are monochrome.
Nu-kote’s cartridges cost up to half that much, but Katz disputes any suggestion that the quality of Nu-kote’s refills lags its bigger rivals’, or that the quality of the big players’ cartridges is so superior and complex that it can’t be matched.
“It’s not rocket science,” he said.
But MWA’s Weiss disagreed, saying an inkjet cartridge is complicated technology and crucial to the printer’s quality. Moreover, if Seiko and the other printer makers lose in court to Nu-kote, “we’d see a risk to the consumer of these vendors not investing the same amount of money they’ve invested so far to keep improving these devices.”
In the meantime, Nu-kote alleges that it’s being harassed by the big players. For instance, it says Hewlett-Packard keeps making small changes in its cartridges--moving an ink fill-hole slightly, for example--just to force Nu-kote into scrambling to come up with a similar device and therefore disrupt sales, Katz said.
“They’re phony changes in technology,” he said.
Lawyers and spokespersons for Hewlett-Packard had no immediate comment on the case. But in court papers, HP accuses Nu-kote of packaging its cartridges with wording that indicates “its inks meet or exceed specifications of Hewlett-Packard.” HP claims they do not.
Could there be a compromise? Many cases involving computer components and accessories have been settled simply by having the manufacturer let other parties sell the equipment as licensees, and for a fee.
But according to Katz, Nu-kote’s attempts to do just that have been rebuffed. “We would be delighted to settle, of course,” he said.
And it’s not clear how much longer Nu-kote can afford to wage this battle. In the nine months ended Dec. 27, Nu-kote lost $4.6 million on sales of $256.6 million, and its stock price has plunged to $3 a share from nearly $18 a year ago on Nasdaq.
“Nu-kote is fighting for its life and will devote every resource it can to this case,” Katz said.
But while the litigation is a big factor in Nu-kote’s struggle, it’s not the only one. Nu-kote also makes supplies for typewriters, fax machines, laser printers and copiers, and demand for typewriter and other “impact” machine supplies is falling rapidly in the face of surging sales of inkjet printers and other new technologies.
That’s forced Nu-kote to slash its cost of manufacturing impact supplies, partly by moving production to Mexico and China. But in doing so, it’s incurred substantial restructuring costs.
Didn’t Nu-kote expect this fight when it began selling its inkjet cartridges? Nu-kote got into that business as a natural extension of its other supplies and “was not looking for litigation, even though part of the potential cost of getting into this business is litigation,” Katz said.
“The OEMs [original equipment manufacturers] are using litigation as a way to keep out competition,” he said.
Nu-kote isn’t the only off-brand vendor with a stake in this fight. A few other companies also make cartridges, ink-refill syringes and other items compatible with brand-name printers, including Hitachi’s Dataproducts unit in Simi Valley and Turbon International of Germany.
Dataproducts has steered clear of the litigation by not challenging patents held by HP and others. Indeed, one part of its business involves buying cartridges from those producers, then modifying them to give them extra features and reselling them to the public.
Dataproducts spokesman Chris Hepp said HP and other printer makers do routinely change their cartridge designs. “We continually purchase supply off the market, tear it apart and see what the latest versions are,” he said.
He also said that although Dataproducts is not involved in the court fight, the company doesn’t want HP and the other OEMs to have the market to themselves.
“If there is no other source for some supply, then the company that holds the exclusivity sits there and can charge whatever they want,” he said, noting that Dataproducts’ items also cost up to half as much as OEM cartridges.
But even if Nu-kote and the other outside cartridge makers are allowed to compete freely, and prices do fall sharply, that doesn’t necessarily mean HP, Canon and the others will fall out of favor, said Dataquest’s Fennell.
Some users want the OEMs’ cartridges because the items they’re printing are valuable to them, and they don’t want to take chances with off-brand inks. Others, like those printing mainly monochrome-lettered documents, are driven solely by price.
Just as all razor blades don’t feel the same on your face, Fennell said, the quality of printer cartridges “is a very subjective thing. Everybody perceives the quality they want differently.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Printer Push
A court fight over which firms can see refill cartridges for inkjet printers is growing in importance as sales of the printers continue to climb
U.S. shipments in millions of unites
1997 estimate: 11.8
Source: Dataquest
