Channel Convergence

Reading time: Approximately 60 minutes

Channel Convergence and its Impact on Office Products, Supplies, and Business Equipment Resellers.

As consumers (buyers) continue to take greater control over whose products, services, and content they’re willing to consume, there are profound implications on the old order of doing things.

The change in control from seller to buyer is irreversible and carries with it implications for every business, whether it be large or small. It is the adoption of technology that underlies almost every aspect of this change, as consumers start to take full advantage of controlling their spend to match the capacity of their actual demand requirements.

In the context of business equipment, this means the days of customers on auto-pilot rolling one copier equipment lease into the next, only to find later this may have resulted in hardware capacity many multiples greater than actual requirements, are rapidly coming to an end.

As document management software and efficient workflows are deployed in more and more work environments, less and less is being printed. So, it becomes rarer and rarer for businesses to need the heavy-duty, high-capacity printers and copiers that were necessary for the pre-digital era.

This, also, is an irreversible trend that has major implications on equipment sales, post-equipment supplies revenue, and profits, as well as on technician repair networks whose services are only required while there are mountains of A3 printing devices in the field that require constant preventative maintenance and repair.

The optimal solution for matching demand and supply (eliminating over-capacity) is for consumers to only pay for what they use while also obtaining protection in terms of the opportunity cost that’s otherwise associated with increasingly rapid hardware depreciation and obsolescence.

It is these irreversible trends that explain why Software as a Service (SaaS), and now Hardware as a Service, (HaaS), and perhaps even Hardware as a Rental, (HaaR), are taking over from the old-school transaction-based business models.

It is a combination of these circumstances that point toward the likelihood for a convergence of sales channels centered around the trends for capacity matching enabled by the SaaS and HaaS/HaaR offerings.

1. What do we mean by capacity-matching and the historical propensity to over-supply?

Any time a consumer is required to purchase a product or service with greater capacity than is needed to meet its requirements, that consumer is being asked to pay extra for something that will never be utilized. Now, as we transition to a pull economy the tolerance for over-supply is being eliminated.

2. The Pull Economy and the Tsunami Looming Over a Channel Convergence Event

Seems like copier machines have always been sold a certain way but maybe that’s about to change as office equipment buyers research alternatives in an environment of declining print volumes. As buyer behavior changes and disruptors prepare to take advantage, many of the legacy players will face strong headwinds.

3. Manufacturers and their emerging responses to changes in consumer behavior

A combination of technology and workforce mobility underly a decline in the number of pages printed. As the number of pages printed decline, printing devices with a much lower cost of ownership are brought into play, thereby setting the scene for a shake-up in the distribution channels.

4. Technology and the Change in Mix between the Product and Service Value Components

We all know print volumes in the office are declining which translates into lower demand for expensive, high-output printing and copying devices. However, before a widescale recalibration of demand and supply can occur technology designed to transform the customer experience must first be in place.

5. The Role of Technology in the Disruptors Path to Reshaping the Office Products Industry.

The office products industry is ripe for channel agnostic disruption but, first, the technology platform that eliminates barriers in the current value proposition must be deployed. This will then become the trigger for a disruption that will start in the transaction-dependent office products vertical before it moves on to overwhelm the equipment channel.

1. What do we mean by capacity-matching and the historical propensity to over-supply?

Any time a consumer is required to purchase a product or service with greater capacity than is needed to meet its requirements, that consumer is being asked to pay extra for something that will never be utilized. Now, as we transition to a pull economy the tolerance for over-supply is being eliminated.

Historically, goods and services have been pushed into the stream of commerce, with the consumer having little say in the format of the configuration of the product or service it’s interested in. In a series of potentially self-serving configurations controlled by the vendor, the consumer has always had to choose the one that appears to be the closest to matching its needs.

Oftentimes, in the earlier era when access to information was more restricted, a customer would be forced to rely on the advice of a salesperson to make its selection of a product or service. In those circumstances, where the seller has more control than the buyer, it’s possible for the consumer to be taken advantage of.

The salesperson is generally motivated by compensation and his employer can slant the compensation plan toward the sale of products best-suited to achieving their own goals rather than those of their customers.

Because it’s likely the salesperson has been motivated to sell the configuration that benefited him or her, even over the best interests of their customer, the customer can end up with a product that is not optimized for their requirements.

So long as there’s competition for a product or service, the supplier walks a fine line between the temptation to exploit its customer and the risk of eventually losing the business (and perhaps its reputation) to a competitor that doesn’t. It is the existence of competition and the risk of losing customers that is expected to keep the system honest.

Despite the competition, it’s still possible for elements of exploitation to creep into the overall value proposition.

There are two key elements businesses focus on in the business cycle. First customer acquisition and, second, customer retention.

Customer acquisition is affected by how well customers understand and need the value proposition that’s being offered, and whether that value proposition represents good value for the money being asked for in exchange.
Customer retention is most often affected by the level of satisfaction a customer experiences with the product or service purchased and whether it fulfills their expectations.

In order to fulfill its business objectives, the suppliers’ initial offer must be attractive, and the value proposition clearly understood by its target customers. Historically, the salesperson has played a significant role in this process.

Smaller, less sophisticated companies tend to offer less complicated value propositions. These propositions are simple for customers to understand and to adopt but, as a result, the companies offering them are exposed to competition that serves to put pressure on their prices and, usually, also on their profits. Furthermore, the less complex the value proposition, the less opportunity there is for customer-entanglement strategies, meaning it is less difficult and less costly for customers to switch their suppliers. This is the typical scenario that explains why smaller businesses tend to experience higher customer churn rates than larger businesses.

Usually, there is a strong inverse relationship between the complexity of the value proposition and the customer retention rate. The greater the underlying complexity the higher the retention and vice versa.

Larger companies have the ability, and the resources, to develop complex solutions designed for maximizing long-term retention rates. They also have the foresight to implement these solutions in a series of steps that simplify the adoption process and don’t overwhelm customers. Dealers and distributors can then be trained to sell these solutions into local markets in order to maximize customer acquisition rates.

The larger, more sophisticated companies generally try to make their propositions as attractive and simple as possible so they can maximize their customer acquisition rates. They will then work on their retention strategies, focusing on up-sell and cross-sell opportunities designed to entangle themselves long-term with their customers. This approach typically serves as an effective strategy for ensuring high retention rates because it also serves to increase the indirect costs a customer faces in switching to an alternative supplier.

Clever suppliers have a good understanding of the indirect expenses their customers’ face with a vendor change, especially those suppliers who have successfully entangled themselves in multiple facets of their customers’ business. As suppliers achieve their entanglement goals they typically find they have placed themselves in a position to charge more for their services. At least, that is, until the threshold a customer decides it’s worth going through the pain of making a change is reached.

However, even this retention-risk can be headed off by suppliers who are closely tuned to customer feedback signals about the value proposition. Long before a customer reaches the threshold for switching suppliers it’s likely to be sending signals, direct or indirect, about increasing levels of dissatisfaction. A clever supplier will be acutely aware of these signals and will adjust its value proposition to head off the ultimate danger of a customer loss.

Copiers and Printers

Selling a copier machine or printer without bundled services does not represent a “sticky” sale. It’s simple for a customer to compare the proposed transaction with proposals from alternative suppliers and to negotiate a better deal. The manufacturers and resellers, for understandable reasons, don’t like this scenario and have developed alternatives to avoid being boxed into this corner because they know there’s always someone prepared to accept lower margins and cut them out of a deal.

It is this situation that has led to the manufacturers developing “ecosystems” which, over time, become deeply embedded in customer operations. These ecosystems include equipment, supplies, service, and repair, plus software to help manage workflows and improve efficiency, all of which are then bundled together in return for a monthly fee. This means it becomes far more difficult for customers to compare competing solutions because they all have their own nuances and features that carry different values.

Furthermore, employees become ingrained in the use of the different components that make up the ecosystem and become resistant to change. This resistance is compounded by the owner’s fear of the disruption any change of ecosystem could lead to and all the hidden costs associated with that disruption. At this stage of the business cycle the supplier has achieved its objective and positioned itself to maximize the profits earned from the provision of its services. The clever supplier knows there will be enough warning signals to adjust its tactics if the risk of customer losses approach.

Why isn’t this strategy going to continue to work?

Readers could be forgiven for thinking we’ve described a sales strategy with ongoing longevity and be wondering what, if anything, could disrupt this. However, the reality is, this legacy sales strategy is becoming increasingly ineffective. Resellers who may comfort themselves with the relative stability of the past, and who continue to be reluctant to recognize the significance of changes already underway will, sooner rather than later, be rudely awakened.

Despite the deployment of “sticky” ecosystems that users have been trained to depend on for their operational efficiency, ecosystems that simultaneously accomplish the vendors’ goal for high customer retention rates, there are multiple forces for change accumulating that will overwhelm these barriers and turn the industry on its head.

The direction of change is being driven by:

The consumer, who now has access to enough information to make informed decisions and is able to sidestep the biased of a salesperson who promotes the items its employer has provided incentives to sell.

Consumers are driving the change away from a push economy toward a pull economy. They will no longer tolerate restrictions or additional costs that result from goods and services that don’t match their requirements. Instead, they will simply seek out alternatives that do.

The direction of change is being facilitated by:

The progressive manufacturer who doesn’t have anything to lose when disrupting the status quo.
Technology that disrupts the total cost of ownership (TCO) model.
The reduced need for printed output.

The pace of change is being held up by:

The legacy manufacturer who cannot compete as lower cost alternatives become available.
The reseller who fears the impact of change on its legacy business model.

These holdouts are the elements clinging to the push economy, either unwilling or unable to adapt to changing market conditions.

Conclusions:

1. None of the change forces will be stopped or reversed. In fact, the pace of change is likely to accelerate. As it does, those prepared to embrace and adapt will come out ahead, and those that try to cling to past practices will fall.

2. As the economy continues to convert from push to pull, consumers will increasingly reject solutions that result in them having to pay for excess capacity. Consequently, as the “pushed-supply” of excess is eliminated and replaced with the “pulled-demand” for appropriately sized alternatives, the propensity for legacy suppliers to configure their products and services in such a way as to force customers to buy more than they need, will be eliminated.

3. Elimination of excess translates to lower costs for consumers. Lower costs for consumers mean lower revenues for suppliers. If a shrinking market weren’t enough of a problem to contend with, the traditional barriers to high churn rates will no longer be enough to slow the decline, meaning customer losses will combine with the shrinking market to accelerate the impact. This scenario will have profound implications for the legacy manufacturers as well as the legacy resellers.

2. The Pull Economy and the Tsunami Looming Over a Channel Convergence Event

Seems like copier machines have always been sold a certain way but maybe that’s about to change as office equipment buyers research alternatives in an environment of declining print volumes. As buyer behavior changes and disruptors prepare to take advantage, many of the legacy players will face strong headwinds.

In a mature industry, there are usually dozens of established players, each of whom has its turf to protect and considerations to meet. However, even the largest of these players cannot prevent the changes sweeping through legacy business practices caused by the conversion from an analog to a digital environment. For the first time in the history of commerce, the balance of power is switching from the supplier toward the buyer as the transition to a “pull” economy takes place.

In the legacy “push” economy, manufacturers had enough power to push the configurations they favored on their customers but, in a “pull” economy, consumers have the power to pull the products and services configured the way they want. Manufacturers and resellers that recognize this change, and who provide their customers and prospects with a framework to conduct business that allows the resources they offer to be quickly and easily configured to serve a wide variety of needs, will thrive while those who don’t will not.

Players that recognize this fundamental shift in control and who understand the opportunities emerging out of a “pull” economy will thrive, even in a mature, shrinking market.

Unfortunately, adapting to the pull economy requires making changes to legacy business practices. However, change introduces risk, and risk instills a fear of failure. It is this fear that underlies the tendency to cling to outdated business models and to ignore powerful signals indicating the need for change. Sticking to the past means being left behind and being left behind results in an inferior value proposition, fewer new customers, reduced profitability, and increased customer churn. Combining all these negative business trends with a shrinking market turns into a downward spiral with one (usually bad) outcome.

The Distribution Channels

For decades there has been a clear delineation between the office products (A4) and equipment (A3) channels. This delineation exists despite the selling structure being similar in both channels in terms of the value chain sequence that takes place between manufacturers, wholesalers/distributors, and the independent resellers (dealers) who generally serve the end customers. However, what is significantly different is that sales in the office product channel are generally transactional, while sales in the office equipment channel typically take place via monthly service charges.

Note: Equipment market shares and channel size are estimates based on general market knowledge, not empirical studies and are for illustrative purposes only.

Office Products & Supplies

The equipment manufacturers listed in the table make up a significant portion of total sales with their printers and associated supplies. However, these products are surrounded by 50-60,000 other, mostly commoditized, office products such as paper, pens, break-room, and janitorial supplies, plus technology products such as PCs and accessories. For the most part, this vast catalog of products works its way through the distribution channels in a series of transactional sales that culminate with the end consumer.

Transactional sales are vulnerable to competition, and because they’re mostly commoditized products, it’s relatively easy for customers to switch from one supplier to another to get a better price. Because Amazon is in the office products space, and because Amazon always has the lowest price, more and more consumers, and more and more businesses are switching to Amazon to purchase their office products, their office technology, and their supplies.

Resellers are finding they have to reduce prices to try and fend off this competition. This pricing action reduces the top line as well as profitability, with no end to the downward spiral in sight.

Office Equipment (Print)

Many of the same hardware manufacturers appear in the equipment channel as the office products channel. However, typically, different machines (termed as A3) have been sold into this channel. A3 devices can be defined as the heavy-duty copiers designed for high volume printing, collating, stapling, and other paper handling characteristics with a maximum print size of 8.5 x 17 versus the maximum 8.5 x 14 (legal) available from the A4 printers more widely sold through the office products channel.

Unlike A4 equipment, it’s much more difficult for a consumer to research the price of new A3 machines independently. Furthermore, not only is it difficult to find out the amount it will cost but getting access to who it can be purchased from is also carefully controlled by the OEM’s who assign territories to their authorized resellers.
The internet has no boundaries which help to explain why you don’t see new copier machines listed for sale at reseller’s websites. There is no way for the OEMs to control territory boundaries if they were to allow their dealers to post their offerings online.
Also, unlike the office products channel, most of the sales in the print channel are cloaked under monthly lease payments and so-called “per-click” charges. Resellers charge monthly service fees that are usually inclusive of equipment repair and the supplies needed to operate the equipment.
Ecosystems have evolved which are designed to facilitate the digitization of documents as documents that used to be printed no longer are which serves to reduce the print volume that underlies the entire business model.

As a result of these factors, it’s much more difficult for customers to make cost comparisons between dealers and brands and their respective ecosystems. These circumstances help explain why historically; it has been a much “stickier” sale for the equipment dealer than it has been for the transaction-based business model of the office products dealer. However, even though churn rates have been typically lower, it’s now becoming much harder for equipment dealers to ignore the impact of declining print volumes.

The table, illustrating four different cases, is designed to highlight the problem facing resellers in the print channel. Historically, it has been common practice to roll customers into new leases for replacement equipment. In this example, we’re using a $350 per month lease payment on equipment sized for 50K pages per month. Including supplies, in a cost per page model of $0.01 for mono and $0.04 for color, and a $40 per month services contract, the total client cost over four years is $0.03 per printed page or just over $70K at 100% machine utilization.

On the face of it, a blended cost of $0.03 per page is a competitive deal. However, the underlying problem is the actual degree of utilization that’s likely to take place on the machine and, to realize $0.03 per page, it requires 100% utilization. What if it’s only 10% utilization because the client needs to print 5K pages per month rather than 50K? In these circumstances, the cost per page increases by almost 250% to $0.10 per page.

A more appropriately sized machine (Case 4) may only cost $1K and bring the 4-year expense down to $6.5K at a cost per page of $0.027. Not only is this a 10% per page saving over the original $0.03 benchmark but, more importantly, it’s less than a quarter of the annual spend to print the same amount as it costs to generate the print on an under-utilized A3 machine.

Now think about the problem this creates for the equipment dealer. At 100% utilization on a heavy-duty A3 machine, there’s a revenue stream of nearly $18K per year. At 10% utilization, there’s a revenue stream of $6K per year, and with a low-cost A4 machine substituted in, there’s a revenue stream of $1.6K per year.

While few machines are ever likely (or even intended) to be 100% utilized, let’s assume the most realistic expectation by the reseller at the outset of the lease is for an average utilization of 50%. That means the expected revenue from that single placement would be just over $11K per year.

With print volumes declining and utilization at 10% (or 5K pages per month), then the revenue stream drops to $6K per year, or nearly 50% less than the original (most realistic) expectations. Think about this 50% revenue shortfall across an equipment dealers’ $10M business.

Now think about the revenue shortfall in the context of an appropriately sized A4 machine purchased for around $1K where the revenue stream falls to $1.6K per year, or 85% less than was expected. Think about this revenue loss in the context of a $10M dealer business.

Now think about this problem (opportunity) from the perspective of a customer with whom the salesman has usually expected to routinely roll a “soon-to-expire” lease into a new one.

Think about how likely it will be for this practice to continue in the context of the 70%+ of buyer’s who now choose to do their research, rather than relying on a salesperson for product information, information that’s likely to be slanted toward the specific manufacturer(s) and their ecosystems that they happen to represent. All the customers’ have to do is work up a little table, just like we did, and the chances are they’ll abandon their “lease-renewal-autopilot-mode” and head toward that $1K printer they’ve independently learned is a significantly lower-cost solution.

Ultimately, they will either buy the appropriately sized equipment from their current dealer, (who is forced to swallow an 85% decrease in revenue), or they will buy it from someone else.

Of course, most equipment resellers (and legacy channel manufacturers) are becoming increasingly aware of this problem but, because the solution requires facing-up to 50%+ revenue declines, are constrained from doing so.

It has been possible to absorb pressure and delay changes to the business model because all the major players in the “A3” channel have faced the same, common problem. This situation means, without one of them breaking ranks, or a new entrant arriving to disrupt the status quo, the industry has been able to prolong its ability to “push” its over-priced solution to its customers, whether it resulted in them having to pay extra for unwanted capacity or not.

Unfortunately for the legacy players, prolonging the over-priced solution is tantamount to having kicked-the-can down the road. While it was possible to maintain this approach in a push economy, it’s no longer sustainable in a pull economy made up of increasingly well-educated buyers eager to transact with providers who allow them to configure products and services according to what they need. So, while the apparent business dilemma may contextualize the reasons why the legacy channel players have resisted change, it doesn’t alter the facts, and it’s not going to stop the tsunami now looming over the horizon.

3. Manufacturers and their emerging responses to changes in consumer behavior

A combination of technology and workforce mobility underly a decline in the number of pages printed. As the number of pages printed decline, printing devices with a much lower cost of ownership are brought into play, thereby setting the scene for a shake-up in the distribution channels.

We have already established the framework for arguing that upheaval in both the office products and the office equipment sales channels is going to take place. In fact, more accurately, the upheaval is already underway. It is being driven by the consumer and changes to the balance of power in the traditional buyer/seller relationship as the economy transforms over to a “pull” dynamic in which the buyer has more control.

When this change in consumer behavior is combined with the dynamics of a mature office products, business equipment, and supplies industry, it should start to become more apparent there are irreversible forces in play which mean the likelihood for a convergence of the two, historically well-delineated, equipment and office products channels is becoming much higher.

To help illustrate this, we’re going to move our focus to the main industry players and their various interactions to explain why an upheaval is inevitable.

In this section, we’re going to look more closely at the role of the manufacturers and the steps they are taking to preserve, or expand, their presence in the market. We will then move on to focus on the resellers and the consumers in an effort to tie all of the change elements together to illustrate how they collectively impact the channels of distribution and make it more likely than not they will converge. As we do so, we will also relate these topics to the key product technologies to show how they also underlie the inevitability for channel convergence.

The Key Equipment Manufacturers

Value Proposition Source: February 2018 MarketScape Analysis Conducted by IDC

Between them, these 14 corporations have nearly $350 Billion in global revenues, $230 Billion in market capitalization, and access to nearly $85 Billion in new debt capacity.₁ In addition to ongoing earnings, this debt capacity could be used for the purpose of financing potential acquisitions, as well as for supplementing product and/or channel development efforts. Nobody participating in this industry should underestimate the ability of the industry (at least in the aggregate) to finance change.

_1. When assuming a maximum debt to (current level) EBITDA ratio of 4.

Of course, some players have a greater financial capacity for influencing change than others, and some have a stronger value proposition that’s helpful for developing higher customer acquisition rates than others.

The chart we have provided is designed to illustrate the relative financial strength and market presence of the key equipment manufacturers in the industry. The larger the bubble, the stronger the value proposition, the closer to the left vertical axis, the greater the financial strength, and the higher they’re also placed on the left vertical axis, the greater their revenues and, therefore, market share.

In short, Hewlett Packard is the strongest player financially, the strongest player in terms of their value proposition, and (besides Dell Corporation) also the largest in terms of annual revenues. At the other end of the scale, Ricoh and Ninestar (Lexmark), while both having strong value propositions, are the weakest financially and, therefore, will have less access to conventional financing sources that are likely to be necessary for implementing the strategies required to survive in the changing marketplace.

Certain players, for example, those aligned in the upper left-hand segment of the bubble chart, are more likely to be long-term winners than those that appear in the lower right-hand segment of the chart.

In a mature industry, the stronger players have the financial strength to overwhelm the weaker players, either through acquisition or through organic growth, or through a combination of both.

Now let’s look at the two-year trend in stock prices for 24 of the key players serving both the office products and equipment space. These are displayed left-to-right and top-to-bottom in terms of their relative financial strength as measured by their debt capacity at a maximum ratio of 4x current EBITDA. At a glance, the sort order and the stock price trends help to provide a clear picture of who are the strongest players, who are the weakest, and how the market has viewed their relative performance over the last 2 years.

2-year stock price trends as of April 5, 2019

What should be apparent, even with a brief scan of the stock price trend charts, is that there are very few standouts in terms of consistent, steady, stock price improvement over the two-year time frame. Perhaps this should not be surprising in a mature industry where aggregate sales are declining. However, what will be the ultimate differentiator in terms of how the market continues to reward (or punish) each of the individual companies, is how successful they are winning market share in a declining market and/or redefining their markets as they attempt to diversify into new and growing segments such as 3D printing, clothing, and other industrial, print-related, applications.

With this in mind, we’ll start by taking a closer look at the market leader, Hewlett Packard.

Hewlett Packard:

After HP completed its acquisition of the Samsung printer business in late 2017, it made a declaration that it intended to establish its presence in the so-called A3 copier channel and to develop a significant share of the $55B+ market.

Think about HP immediately after its acquisition of the Samsung printer business as a new entrant into the A3 equipment channel, with nothing to lose in terms of a legacy business model, nor burdened with a need to protect legacy sales practices necessary to maintain the top line. Remember, as we have previously explained, it takes someone to break ranks, or it takes someone with nothing to lose to become a channel disruptor. With HP, we not only had a new entrant with nothing to lose, but we also had a company with one of the strongest value propositions and one of the strongest balance sheets. It was a combination of these differentiators that meant HP was, at least on paper, well positioned to become that disruptor.

However, within 12 months of closing the Samsung acquisition, HP closed another significant deal that may have altered its position as a potential disruptor.

On November 1, 2018, HP closed its deal (previously announced in August 2018) to acquire Apogee, a UK based office equipment dealer with a leading European presence, for around US$500 million. HP had said the acquisition “would further its plan to disrupt the $55 billion A3 copier/MFP market”. In addition to already being a reseller of HP and Samsung equipment, Apogee has also sold office equipment sourced from Canon, Ricoh, Xerox, Kyocera, and Konica Minolta.

However, in acquiring Apogee, HP also acquired legacy business practices that it now needs to protect (manage) in order to justify its investment. There are two possibilities here:

1. In acquiring a legacy business, HP will quietly drop what may have otherwise been an aggressive disruption plan leveraging its vertically integrated business technology to deliver the lowest possible cost of ownership solution to the channel customers, or;

2. That HP believes it can acquire legacy businesses and still execute its plan to rapidly develop a leading market share in the channel.

Regardless of which of these two may be the case, we shouldn’t expect that HP’s acquisition activities will end with Apogee.

For example, think about HP in its context of $5B in annual EBITDA and in terms of its current $18B of potential new debt capacity. Then think about their capacity to potentially snap up the (often discussed) Xerox business for around $10B (a 30% premium to current market cap), a business that currently generates its own EBITDA of $1.7B and, when combined, could be absorbed into HP with a manageable post-acquisition/pre-synergies debt to EBITDA ratio of less than two.

Assumes the deal cost is $10B but, prior to the deal, Xerox divests its finance arm to reduce its current debt by $3.0B.

$4.71 + ($4.27 – $3.0) = $5.98 +$10B = $15.98

While we will all continue to speculate on this possibility until it’s no longer a possibility, because some other event takes place that precludes it (including that of an FTC intervention), regardless of whether Hewlett Packard goes down this path, they already have all the tools in their war chest they need to disrupt the channel and are probably already able to do so on their own terms. Without more acquisitions, it will take them longer to develop the market share they are targeting but, eventually, they will probably get there.

Effectively, they already have the power to manage the pace of change by attacking opportunities to win customers away from their competitors using all the technology platforms they have at their disposal, options that their competitors may lack. Furthermore, they probably have the skills to accomplish this while simultaneously preserving the legacy business model where it strategically makes sense to do so.

How does the relative strength of HP impact its competitors in the equipment channel and what does this mean in terms of increasing the likelihood for the sales channels to converge?

HP has certain technological advantages over many of its rivals. It has a full complement of A3 laser, A4 laser, and A4 page-wide-array business inkjet printing devices. Between them, these machines can be configured to suit the changing needs of the so-called A3 channel. The trump card they hold is that, depending on print volume requirements, A4 laser may be 50% of the cost of ownership of a typical A3 copier device, and A4 business inkjet (page-wide) may be as much as 50% lower than the TCO of an A4 laser device. In the world of declining print volume, this provides HP with a significant competitive advantage.

For HP’s competitors to remain competitive, they must also have access to equipment with a similar cost of ownership or HP will eventually steal away their customers. For proof of this reality, we need to look no further than the following list of market developments;

Canon, also deploying a series of business-suitable page-wide-array inkjet printers, has a similarly strong balance sheet and value proposition to that of HP and, with an independently self-sufficient critical mass, is not confronted with the need to seek out a partner to hold their own in the channel.
Konica Minolta partnering with Memjet for access to their page-wide ink jet technology.
Toshiba partnering with Brother, possibly for the same reason. Note, investors at Toshiba are urging the parent to sell off its non-core businesses such as Toshiba Tec. Perhaps the already-announced partnership with Brother is the precursor to a permanent combination.
Seiko Epson, also with a series of business suitable page-wide-array inkjet printers already in the market, is not in a publicly disclosed partnership with another player in the A3 channel. However, with the most important element of the product platform technology necessary to compete, but a less well developed overall value proposition (ecosystem) and lacking the required critical mass, they may be open to a combination with a well-capitalized player, such as Kyocera Mita, who will otherwise find itself at a significant competitive disadvantage.

Where does all this lead us?

Well, HP, Canon, Toshiba/Brother, Konica Minolta/MemJet, and potentially Kyocera Mita/Seiko Epson, either will be or could be, well placed to compete effectively in the channel. It leaves the others, Fujifilm, Xerox, Sharp (Foxconn parent), Ricoh, Ninestar/Lexmark, and Okidata all at a serious disadvantage.

It also means that, as the key players are forced to fight it out with products that trend toward the lowest TCO (A4 page-wide inkjet array), the introduction of A4 to the previously dominant domain of A3 will be accelerated. As it’s accelerated, and as the legacy equipment resellers hesitate to embrace the trend because of the impact on their top line, then the primary resellers of A4 equipment (i.e. the Office Products resellers) will sense the opportunity to enter the channel. This is the developing scenario that underlies the prediction for a channel convergence event.

We’ll be going on to take a deeper dive into the challenges that a traditionally transactional business operator will encounter, despite being willing to offer a better-aligned value proposition, when trying to sell to a customer base used to paying subscriptions for print related services as opposed to purchasing a printing or copying device in a simple business transaction. We will relate this challenge to other developments taking place in the market as the larger organizations, such as Staples and Office Depot, make their moves toward service-based value propositions.

4. Technology and the Change in Mix between the Product and Service Value Components

We all know print volumes in the office are declining which translates into lower demand for expensive, high-output printing and copying devices. However, before a widescale recalibration of demand and supply can occur technology designed to transform the customer experience must first be in place.

We have argued our case, building a foundation that the conditions exist for significant disruption to occur in the conventionally accepted means for placing printers and copiers into the marketplace. Ultimately, it appears certain a shake-up will take place.

What is less clear is understanding the remaining barriers that continue to impede the disruptive process, and the pieces of the puzzle that must be connected before deployment of a new value proposition will take over.

We regularly use the analogy of disruptive events occurring in the transportation industry, with Uber and Tesla being the immediate examples that spring to mind. Both are technology companies and the disruption they’ve initiated could not take place without the technology platforms upon which each of them is based.

Uber disrupted the paid-ride business, deploying technology to connect supply and demand and enable a solution that provided a better experience at a lower cost than conventional transportation methods were able to.

It has become so simple to summon a ride using a hand-held device that the technology underlying the service is taken for granted.

It was only a few years ago that the goal of aspiring individuals in the paid-ride business in New York City was to acquire a Medallion (license) that permitted them to operate a taxi in the regulated environment. As recently as 2014, this license required an investment of up to $1.3 million. Today, the value of a New York Medallion is less than $150,000 and it’s difficult not to feel a pang of remorse for individuals who made this investment late in the business cycle and who are now unable to generate a return.

Tesla is disrupting a global industry, not just the automotive industry, but the entire energy sector, including the global, politically charged oil industry. Almost single-handed, providing the impetus for converting the automotive fleet from the internal combustion engine to electric. Think of the implications in terms of the oil industry, the environment, and the legacy auto manufacturers.

Powerful industry segments have continued to assume the status quo will remain in place while they extract profits from the often over-priced and under-utilized assets they provide.

Uber and Tesla are closely related in terms of their dependence on technology. Don’t think of a Tesla as an automobile, think of it as a software package wrapped up to appear as an automobile. Think of Uber, also as a software package, built to enable a vehicle to magically appear when you summon it. While it may not be tomorrow, in the not-too-distant future when you summon a ride it will be a self-piloted electric vehicle that arrives to transport you to your destination. Uber is ahead of the curve in terms of its technology and infrastructure for connecting supply and demand, and Tesla is ahead of the curve in terms of providing the platform for physically transporting customers from point A to point B.

Now think about the founders of Tesla and Uber, counting on the natural inclination of the consumer to only pay for what is needed at the time it is needed, and their foresight to leverage this aspect of human behavior to accelerate the disruption process. In this context, think of our legacy practice of spending $40K every 4 or 5 years (or leasing for $400+ per month for 4 or 5 years) to acquire (rent) an asset that will sit, unused in garages and parking lots for 95% of the time.

The desire to own a motor vehicle became ingrained in our behavior over the 100 years or so since Henry Ford made it affordable but, as technology provides viable alternatives, it’s turning into a liability and a drain on personal wealth.

Making an investment in an expensive asset destined to be utilized only 5% of the time, an asset that’s also associated with other significant operating costs, such as insurance, maintenance, taxes, and license fees, etc., will come to be viewed as a waste of money and resources. While it’s understandable how owning a motor vehicle became ingrained in our behavior, it should no longer be beyond the realms of our imagination to foresee how not owning one in the future could feasibly become the new norm.

In turning our attention back to office equipment, think about some of the parallels between an automobile and a copier machine. Under-utilization, repair, maintenance, and the ongoing cost of supplies necessary to keep it running – not so different from an automobile.

In the new era of declining print volumes, the copier machine, that the industry leverages to drive a legacy revenue and profit model, can also be viewed as a waste of money and resources. With our parallel examples in place, it becomes increasingly difficult to argue against the potential for disruptive events to take place in the office products and equipment vertical.

However, to understand the path toward disruption, we must think about these circumstances in terms of the distribution channels, in terms of the businesses that operate in these channels, and in terms of the technology platforms utilized to sell products through these channels.

First, we must put the requirements for service as part of the value proposition into context.

In a process no less certain than the passage of time itself, the value component of a product is never greater than the day on which it was first introduced to the market. From that day onwards, an inevitable decline takes place in this component of the sellers’ proposition as it’s gradually replaced by the service component. This trend is distribution-channel agnostic. It simply doesn’t matter whether you are a reseller operating in the transaction-dependent office products channel or the more service-oriented office equipment channel.

The office products and equipment industry is a mature industry and the crossover points between the product and service components have probably long passed. However, regardless of whether they have or haven’t, anyone understanding the inevitability of the crossover must also understand the only way to survive is to incorporate ever-increasing levels of service into their value proposition. Stragglers who fail to do so will eventually be eliminated from the market.

To contextualize this we need to look no further than Staples and Office Depot, as this is the fundamental thinking underlying their moves toward service-based value propositions. Both these entities have embarked on their transformations, with Staples making a series of acquisitions including HiTouch, Dex Imaging, and Essendant, and with Office Depot acquiring CompuCom. Both organizations are also doing deals to add conventional revenue, necessary to support their top line in a shrinking market, by acquiring regional dealers with the expectation to then leverage their long-held relationships in their respective markets to roll-out their increasingly service-oriented value propositions. Collectively, these strategies are designed to play into the services model with both entities knowing they have no choice if they wish to survive.

We have argued our case for channel convergence, and we have provided examples and parallels with other industries to illustrate that conditions are ripe for disruption in the office products and equipment space. But what do these circumstances really mean for the two primary channels of distribution for office products and equipment into the marketplace?

Office Products

Typical office products and supplies resellers rely on their high levels of customer service, extensive product catalog, reasonable prices, and long-standing relationships in their regional markets to manage customer loyalty. The fact that their value proposition is not wrapped up in some kind of recurring subscription model doesn’t mean they have totally failed to address the transition from a product-based to a service-based value proposition. What it does mean, however, is that they remain exposed to comparison shopping, and are increasingly vulnerable to the threat coming from Amazon and other, powerful competitors who have built a strong online presence.

Most of the channel resellers operate on legacy technology platforms whose roots go back to the 1990s or earlier. Disruption, in the digital era, is usually contingent on technology, but there’s no evidence the platforms in use today are likely to become the foundation for disruption. In short, they were designed for a different era.

Office Equipment

As we all know, the office equipment channel is dominated by managed print and managed service contracts. All sorts of technology have been deployed to monitor printer and copier devices for ink and toner levels, manage and trigger supplies reorder points, and monitor for preventative maintenance as well as for failure diagnostics.

The channel has focused for 15 years or more on securing multi-year contracts and bundling a range of services into recurring monthly fees. It’s far more difficult for competitors to unravel these bundled services and, outside of contract renewal times, to take business away from an incumbent.

The problem, however, is that there’s a far more limited market for this style of a value proposition. The selling cycle is comparatively long and the cost of customer acquisition quite high. Furthermore, any time there’s a complex, multi-year agreement being contemplated, there’s also a much higher likelihood that expensive lawyers and senior management will need to get involved. These circumstances mean the value proposition is usually only suitable for larger companies with the resources necessary to fully understand the agreements they require.

Because it’s a complicated and extended selling cycle, it’s also full of friction points for the customer to deal with. Just imagine if there were many friction points incurred when summoning an Uber because, if there were, Uber would never have become a disruptor.

What we’re illustrating here is that the technology currently deployed by resellers in the equipment channel is unlikely to disrupt the channel. In fact, it’s obsolete technology perpetuating a flawed business model that will be swept aside as the disruptors take over.

Conclusions

What we have here are the conditions ripe for disruption, but what we don’t have is the Uber or Tesla-like technologies to facilitate that disruption.

So, we have a channel of transactional sales resources (office products) with access to the printing technology (A4) that’s eminently suitable for the reduced volume requirements of the traditional copier (A3) channel. However, these sales resources generally lack the “service-oriented” selling skills currently necessary to sell into that channel and, furthermore, regardless of this skill-set deficiency, will inevitably run into selling cycle issues of their own when they try to break into the multi-year contracts that protect most of the potential business opportunities.

The missing piece of the puzzle is the Uber-like technology that allows the customer to purchase products and services configured to match what’s needed when it’s needed and that this can be accomplished regardless of the skill-set of the channel salesperson representing the product or service. We have to accept, it’s unlikely there will be a successful re-training of a transactional salesforce toward service-based selling skills so it must, therefore, be down to technology to solve this piece of the puzzle.

5. The Role of Technology in the Disruptors Path to Reshaping the Office Products Industry.

The office products industry is ripe for channel agnostic disruption but, first, the technology platform that eliminates barriers in the current value proposition must be deployed. This will then become the trigger for a disruption that will start in the transaction-dependent office products vertical before it moves on to overwhelm the equipment channel.

Business transformation and disruption are over-used terms we are accustomed to hearing of with ever-increasing frequency. It is common for innovators to promote they are the next big thing as they compare their concepts to widely recognized disruptions such as the paid-ride (i.e., Uber) and entertainment (i.e., Netflix) industries that have already transformed. However, while it’s quite common for innovators to believe they have created the latest technology for disrupting an industry, often this is not the case. More commonly, while they may have developed a value proposition that provides for incremental improvement, it’s far less likely, the barriers that combine to block disruption will have been fully eliminated.

For entertainment, little more than ten years have passed since we had to visit the local Blockbuster to rent a movie for the weekend. Then Netflix arrived and transformed the experience by delivering movies on demand directly into our homes. In doing so, they eliminated the time it took for us to get to and from the store, they removed the friction resulting from frequent supply constraints on popular new-release movies, and they wiped out late fees, the biggest source of profits in the legacy model.

Amazon is also viewed as a disruptor because they transformed the shopping experience, removing barriers, and causing the downfall of many high street retailers who failed to respond to the threat. They have deployed technology to present the widest choice of products possible, the most competitive prices, and the fastest delivery. It has become unnecessary to physically go to the store, even if some of us still prefer to do so.

Disruptors are attracted to large, mature industries because, typically, the players inside those industries cannot see or understand the threat of disruption until it’s too late. Usually, it takes an outsider, capable of taking a completely different perspective to come up with an alternative that will be adopted by the market.

Regardless of how valuable a product, service, or company has been in the past, loyalty counts for little when it’s compared to the convenience or the benefits of other simplifications in the process that are introduced by a competitor.

It is our view that the office equipment, products, and supplies industry is ripe for a technology-led disruption event, an event for which resellers are poorly prepared. The most common technology platforms resellers operate on were built to support the way business was done in the past and are incapable of supporting the way customers will expect to conduct business in the future.

These platforms do little to help independent resellers survive the threat posed by Amazon and other online competitors.
While some of them may be evolving, there is little evidence of a movement toward technology designed to remove barriers built into the current value propositions.
They are incomplete solutions that do little to help technologically unsophisticated owners improve their online presence.
Lack of systems integration impedes the ability to convert raw data into actionable business intelligence.

With 70%+ of buyers’ searching online for answers before engaging with a salesperson, it has never been more important for the independent resellers’ website to become a destination for addressing a potential buyers’ research.

Technology and the Digital Workplace

Technology is also disrupting the way people work, although, Amazon or no Amazon, the process used to provide customers in the office environment with the products and services they need has not changed substantially during the last 10-15 years. Furthermore, in not changing, it is failing to adequately account for the ground-shift in how workers operate, where they operate from, and how businesses are starting to adapt to these changes.

Software tools, in combination with access to the internet, underlie massive changes in workflows as documents are “born” digital, thereby reducing, or even eliminating, the need for printed output. The internet enables 24/7 access to digital filing cabinets and facilitates remote sharing and collaboration for content creation and approvals. These two technology factors combine to remove the shackles that used to tie workers to corporate offices.

An important consequence of these developments is the rapid dispersal of the workforce away from the corporate office.
Among other things, this trend serves to eliminate the time workers used to waste commuting to and from their employer’s office.
The combination of software tools, internet access, and remote working means workers are becoming way more efficient than previously possible.

These factors must also be considered alongside the changing profile of the workforce as Millennials’ continue to make up a larger share of the total. It’s important to understand that Millennials typically have a different outlook for their career paths than workers from previous generations. While it may be a difficult change for legacy employers to come to terms with, they choose to exercise more control over their lives, value leisure time more highly and elect to work more on their terms than those of legacy employers. Typically, if their employer does not permit them to work flexible hours from their home, from Starbucks, or some other convenient location, they will choose a different employer. This means the employer who decides not to accommodate the lifestyle preferences of a Millennial is unable to attract or retain the best talent.

Now think about this trend in the context of the typical set of office requirements. Instead of utilizing the employer’s capital assets and services, such as furniture, copier machines, office space, bandwidth, etc., someone else’s assets, such as Starbucks, are utilized instead. This has profound implications on the future requirements of a business. They will purchase less furniture, lease less space, and buy fewer technology products, business equipment, office products, and supplies for their corporate office.

Although many of these products and services may still be needed, more and more of them will be needed in remote locations rather than the corporate office. This dynamic complicates the process and responsibility for cost control and becomes an entirely different ball game for the traditional management structure to deal with. Indeed, this is one of the numerous friction points that underlie the employer’s reluctance for allowing its workers to work remotely.

Obsoleting the Central Print Station

When workers used to come into the corporate office, and when just about everything was printed and copied, there was a strong argument for establishing central print and copy stations designed for low-cost, high-output requirements. These circumstances supported the business case for expensive copier machines and spawned the managed print, service, and repair business model along with multi-year contracts and cost per page billing models. But, as we’ve explained, reduced print volumes and dispersed workers mean this value proposition is no longer appropriate for many businesses. Furthermore, despite the shift in customer requirements, the channel that sells copiers has been slow to adapt because doing so would have a profoundly negative impact on their current business model. So, instead, the channel continues to sell the value proposition established decades ago that’s based on brand-centric solutions from dealers operating within territorial boundaries that are closely controlled by their original equipment manufacturing (OEM) partners.

While you can configure and purchase a brand-new Tesla online, just try doing the same for a copier machine!

Consequently, many businesses continue to purchase, or lease high capacity copier machines and to organize their office around the central print location even though they may no longer need to do so.

Changing Spend Patterns

Consumers are diverting their spend toward online solutions such as those provided by Amazon. While this trend may be gaining traction more quickly in the transaction-heavy channels (such as office products and supplies) where comparison shopping (price) is simple to do, it would be naive to think it won’t continue into the office equipment channel. Furthermore, this is likely to take place regardless of the bundling of services and multi-year contracts that are designed to make comparison shopping more difficult. Contracts and bundled services may delay the threat Amazon poses to this channel, but they will not eliminate it.

It is common for many of the dealers threatened by Amazon to start thinking they must copy their business model to compete or, worse still, must join their marketplace to develop their online presence. Setting up an e-commerce store to compete with Amazon is [very] unlikely to succeed and joining their marketplace is a decision that ultimately results in the handing over of their customers. Therefore, neither are viable strategies. Remember, Amazon incurred 15 years of losses and spent billions of dollars, building its value proposition and, today, doesn’t even make its profits from shopping. Instead, it makes the bulk of them from Amazon Web Services (Cloud Hosting) and Amazon Prime (memberships and digital content).

Dealers who decide to leverage Amazon’s technology (rather than their own) to try and remove barriers in their current value proposition advance Amazon’s endgame and accelerate their own downfall.

Think about the inverse relationship between customer loyalty and the availability of an alternative value proposition that eliminates existing barriers. Think for a moment how the equipment channel has resisted taking the lead to reduce the total cost of ownership related to printing devices and their output and think carefully about this in an environment of ever-reducing print volumes. The page-wide-array business inkjet printers from MemJet and Hewlett Packard have been available for years, but their market penetration is very small despite their lower cost of ownership. It’s likely one of the main reasons market penetration is low is because the revenue per device is as little as 25% that of an over-priced, under-utilized, legacy copier device.

How many dealers can embrace a value proposition that generates a quarter of the revenue the current one does? Of course, not many so, instead, they focus on the legacy practice of rolling existing customers into new equipment leases and evergreen service agreements to continue to try and protect themselves from external threats. However, this legacy value proposition is increasingly vulnerable to a new proposition that eliminates;

Customer friction points incurred with complex, multi-year agreements.
Provisioning excess print capacity.
Deploying equipment that requires frequent service and repair.

The legacy value proposition is even more vulnerable to a new proposition that also solves the other emerging problems businesses face, particularly those of managing a spend taking place in locations outside the central office that will become increasingly difficult for purchasing managers to retain control over.

A value proposition that;

Leverages existing technology in terms of monitoring print volumes, cartridge reorder points, and authorized vendors for resupply.
Goes beyond helping a business manage the spend on traditional office equipment and supplies and provides a scalable solution that helps manage the myriad of other issues that surface with a remote workforce.
Helps customers onboard and off-board new and departing employees, their company-issued assets, and their company related activities.
Allows customers to intelligently determine what their true requirements are and only to purchase what they need.
Facilitates flexible bundling of products and services configured in such a way that customers only have to buy what is needed and can accomplish this without having to get a lawyer involved to provide the okay for a CFO to sign-off on.
Provides seamless access to reordering portals using mobile apps designed to accommodate a dispersed spend, significant amounts of which will be initiated by remote workers, while ensuring the corporate purchasing department has full control over that spend.

In delivering such a value proposition, the resellers are positioned to present their customers with a compelling case for supplying a broader range of products and services that are necessary for them to survive in a shrinking market.

Unfortunately, not every independent reseller can survive in a shrinking, changing market but the question becomes whether the only survivor will be Amazon, or if it will be Amazon alongside a large group of financially healthy, independent resellers. Resellers can thrive in local markets by delivering services the giant behemoth is unable to, but this means they must adopt the technology necessary to match the logistics performance of Amazon while also providing the range of products and services their customers need. Unfortunately, though, while local service, management access, and know-how, are all attributes customers value, even when these are combined with “Amazon-grade” logistics technology it’s unlikely to be enough to deal with the long-term online threat.

Remember, taxi customers, and movie viewers didn’t define the services that Uber and Netflix provided, just as the customers for office products and equipment will not define the services they will embrace in the future. Thereby, it must be down to the visionaries who understand the barriers and who have the capabilities to deploy a system that eliminates them. This and only this will serve to disrupt the industry, while also serving to potentially take the initiative away from Amazon and other online threats.

Technology and the Disruption Cycle

Even when technology is available that eliminates existing barriers, there must still be someone sufficiently motivated to pull the trigger it represents before the disruption cycle can begin. Think about the equipment reseller who is compromised by top-line objectives and who can’t pull the trigger because it results in a potentially catastrophic reduction in revenue. Then think about the office products channel sales resources which, although they may already sense an opportunity in the equipment channel, are not equipped to talk to prospects trained to listen to service-oriented sales pitches.

Unfortunately, while the office products dealers may be less conflicted to pull a disruptive trigger, they’re not currently equipped to do so in the channel where the biggest opportunity may lie.

What all this means is that an additional burden is placed on the technology solution before it can become a trigger for the disruptive event. Ultimately, this solution must be sufficiently intuitive and sufficiently compelling, that it will be embraced by resellers in the office products channel and then rapidly adopted by customers in their transaction-oriented business model. Only then will it move on to be adopted by customers in the service-oriented equipment channel.

Ultimately, once the process has started, the equipment dealers will have no option but to adopt it, or they will go out of business.

Channel Convergence

Channel Convergence

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