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Dr. Joe Webb Responds to Quarterly Outlook Webinar Questions

Thanks again from Dr. Joe Webb and the WhatTheyThink staff to all of you who joined in on the March 30th Quarterly Update Webinar. We had the largest number of participants ever, and lots of questions. We really appreciate the interactivity. Unfortunately, we were not able to address all of the questions live during the Webinar, and, as promised, are answering the rest here! We will look forward to your joining us for the next Quarterly Update Webinar, and of course, to your frequent visits to WhatTheyThink!


Which print market segments do you expect to be weakest?

If it’s sheetfed, it’s in trouble. The Internet has reduced the need for brochures, sell sheets, and many other materials that were the mainstay of this business. Other segments are in trouble too, but this one has been for quite a while.

But don’t get me wrong: there are print businesses that are doing better than their competitors, and there’s lots of volume that they can pick up from weak competitors as those competitors go out of business and disappear. So there are sheetfed printers that are doing well, but many are in trouble.

What will the effect be on pricing and profits for the longer-run printers from last year's announced major press investments by Quad, Quebecor, American Color Graphics, etc?

I’m always concerned that prices for print are too high compared to other media, and new and more productive presses, in fewer but better run plants, are part of the answer. Old equipment penalizes printers more than ever.

More detail on why small printers are in trouble?

Gosh, where do I start? Maybe a list will help: e-mail, Web sites, PDF, home computing, desktop printers, networked printers in offices, copiers in offices and at home, office superstores with printing facilities. I think that’s a long enough list. And too many are still out there selling commodity ink on paper—with price as the primary differentiator.

Are companies buying print in such small quantities that a digital print solution is something conventional printing companies should look into?

Small quantities they can do themselves, but they should be looking into digital printing anyway, and figure out how they can change what they produce today to make it more valuable digitally. Here’s an article you should check out http://www.cenveo.com/media/05Releases/032505SmithNephew.asp

What is the outlook for the financial printing marketplace?

I’m not an expert in this area at all. The few companies that have survived in this area (and I remember companies like Chas. P. Young, Pandick, and many others that were considered good companies with long histories in this area but are no longer with us) are expert at electronic filing and posting of the data as well as the printing. This market has often depended on IPOs and offerings of securities to stimulate business. The recent Sarbanes-Oxley law has made companies think twice about having an IPO and many are looking to be acquired by other companies instead. Some companies are looking to go private rather than incur the accounting costs of this law. It doesn’t seem like all that pleasant a market to me, but events like the passage of personal accounts for Social Security may give it some upside.

What about the level of "ink on paper" -- i.e. taking out the value added services such as database management Another way to ask the same question: What do you see as the past and future level of printing in terms of "real" things like tons of paper, pounds of ink, or number of impressions?

My column of a few weeks ago addressed this http://members.whattheythink.com/drjoewebb/drjoe96.cfm#2 . Much of the effect of this on volume is overestimated, and my comments there explain that.

It is projected that noncommercial mail will constitute more than 50% of the volume through the USPS. What changes do you foresee for 1st class postage vs. bulk vs. bracket shifts?

I think the USPS will do whatever it can to keep business mail going, and I think they’re more sensitive to how their shifts in balancing pricing will affect use of USPS services. If you write me back with a bit more detail I think I can have a better understanding of your question.

As a corollary, if the bulk rates go up, do you expect this will expand the use of electronic bill presentment?

Postage is the tiniest part of this issue: processing costs are more important. Online banking for business and for consumers is a significant growth area, and will continue to be so. The first wave was the expansion of the use of credit cards (consolidate expenses onto one bill) and the next wave will be direct payments. The economic benefits of these far outweigh the impact of postal changes.

For those hardware vendors who purchase our raw materials from abroad, when do you think they will have to start reflecting that in our prices to US customers?

They may be stuck. I’d be operating on the assumption that I might not be able to pass these costs on and reorganize my business accordingly. Then at least if there is some pricing headway, the benefits will make it to the bottom line. But otherwise, I would not hope that price increases could be passed on.

Outsourcing is not always to small independents. Companies like IBM Global Services are growing very nicely.

That’s exactly right. IBM has done a stellar job in this transition. But also see my recent column http://members.whattheythink.com/drjoewebb/drjoe103.cfm#2 where I talk about the growth of small business.

As petroleum prices continue to increase, what (if any) alternatives are being developed to offer non-petroleum based alternatives (for those who print on "plastics") and what effect (long term) do you see this having on our industry?

I’m not all that familiar with this area. In the packaging businesses, everything is going up, papers, metals, plastics. Packaging costs are relatively inelastic: products need to have packaging, of course. But costs of handling or benefits of shifting product size, or shifting from folding cartons to standup pouches, or other formats are real. I suspect that’s where it will play out.

Mail trends ... what are your expectations with the upcoming postal rate increase?

Unfortunate and unavoidable. The question will be to what extent discounts can be achieved by doing more of the USPS’ work for them in terms of sorting, formats, and delivery. Watch those areas carefully as they may mitigate the increases. Many small mailers can’t get to those levels, and that’s where the problems might be most prevalent.

Do you expect to see more vendor consolidations during the next few years?

Absolutely. Printers are consolidating and centralizing their decision making, creating a rise in national account and eventually global account responsibilities. These will play out, in addition to a reduction of relative print demand and an increase in digital workflow, into a desire for vendors to merge, defensively.

Regarding direct mail, how much of your direct mail volume is transactional printing vs. advertising direct mail?

For my forecasting purposes, I ignore transactional printing (bank statements, invoices, etc.).

Please explain the reference to "beware of 2007" on Slide 27.

Sorry I skipped that. I think there are many trends (broadband, other technologies) that play out in their adoption into a 2000-like scenario for the print business. It may not be pretty.

Any indication on how different commercial printing vs. packaging printing will fare in the coming months?

Packaging printing will do better, but not by a whole lot.

Can you comment on HP's new CEO appointment and any rumors about how this may impact HP's digital print business?

Mr. Hurd has barely learned where the men’s room is, so I doubt he knows much about HP’s digital printing business yet. He obviously has to decide if it’s in HP’s interests to be in the same businesses as Xerox, Kodak, Canon, and other niche players. My gut tells me he will look hard at it and decide to break it off and merge it with someone else.

Do you have any comments on which areas of the printing industry, i.e. flexo, web, sheet, digital, etc., are leading or lagging regarding revenue growth and profitability?

Digital is growing, flexo packaging is doing well, web offset needs the magazine business to really rebound, and sheetfed is declining which is why digital is doing well. Profits? On Printing? Please explain. :)

Do you think that improvements in variable printing presses could bring back clients to the traditional print shop?

Nice applications, yes, but most digital variable printing has the same unit production cost, where the other print methods have a declining unit cost (the old economies of scale thing). The question is whether or not the value is so great that this retrograde cost structure can be overwhelmed by benefits. I don’t think they can, except for the most innovative direct marketing programs.

On the 2007 deadline, I believe the 300 dpi display will be the next big impact on print and that could be around that time. Is this what you are thinking of, or something else, or nothing in particular?

There are so many gadgets coming to market that are enhancements to current products, or just plainly new and better connected, that I can’t pick one thing at all. It’s a load of technological and demographic things that I suspect are heading in a direction we as an industry would prefer they not head in.

What area of expansion/diversity would you suggest printers expand into with all the industry and technology changes?

I still think the strategy of communications logistics is a viable strategy for many printers. It’s described in my “Renewing the Print Industry” report, which you received (or will shortly) just because you asked a question in the webinar.

Do you expect M&A among printers to be focused around acquiring other printers, or do you expect more diversification to avoid the "2007" problem? If diversification, what other products will printers start trying to offer?

There will be no identifiable significant diversification. I do believe that the mergers and acquisition wave that will be coming will be defensive in nature, to markedly reduce overheads and production costs.

Also, where are the global M&A hotspots? Europe, EMEA, S. America, or N. America?

Asia will be an offensive strategy, to get into growing markets, especially India and China, early. Europe and North America will be defensive M&A, and I don’t anticipate much activity in South America or the Middle East and Africa.

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