How does the managed print services industry look from Wall Street? With over 13 years experience in equity research, nine of which were focused on IT hardware and imaging technology, Shannon Cross spoke with The Imaging Channel to share her take on market growth, OEM leadership, mergers and acquisitions, and the importance of the channel.

Market Value and Growth

Just as the industry as a whole has difficulty defining MPS, a big challenge in valuating the MPS market is first defining it. “I’m defining it at $7 billion dollars, which is what I think the revenue being generated by it at this point in time is,” said Cross. “The addressable market, arguably, is probably multiples of that number, because effectively it would be almost any printing installation. Small business can be tough, but on up through medium and large business, you can argue that almost any of those would be an opportunity for an MPS contract.”

MPS has allowed dealers to create new strategies that help capture more pages from existing accounts and increase sales in new offerings, including consulting services and monitoring software. It’s clear that most dealers are fighting to grow their piece of a pie that isn’t growing much, if at all.

“We have (the MPS market) growing at about 15 percent year over year,” said Cross. “I think, in general, in 2010, assuming the economy remains somewhat stable, growth rates will be a little higher this year, because you are coming off of such a low number in 2009. I think in general, 15 percent is probably a reasonable number for the next few years, and a lot of the growth in that number is clearly software and services, attached on top of the hardware sales.”

OEM Leadership

The managed print services market continues to be dominated by the usual suspects, but more opportunities may be available for the channel as top OEMs turn their focus to channel operations.

“I think at this point in time, the lion’s share of the MPS market is held by the OEMs,” said Cross. “HP and Xerox are really the leaders in the market. Clearly, Lexmark plays in to some extent with some of their solution services, but I think it’s still early days for the channel.”

HP and Xerox are always fighting for the top spot. Cross discussed who she thinks is the leader between the two, and why she doesn’t expect the leaders to change in the near future.

“I think Xerox is in the lead. It goes into how do you define MPS and what do you consider an MPS contract,” explained Cross, “but Xerox has been doing this for years.” Prior to MPS becoming the talk of the industry, Xerox offered related services like process mapping and printing optimization.

“HP is making a big push, clearly with the channel, they’re working on that,” said Cross, “and they also—through their relationship with Canon, and their own devices, and what Bruce Dahlgren’s group is doing at HP—are really trying to move more into the enterprise. So, it’s a focus of HP’s, it’s clearly also a focus of Xerox, but I think right now Xerox is probably leading in terms of market share.

“I’m not sure I expect (the leaders) to change significantly in the near term. I think with the head start that Xerox has, they’re probably going to remain in the lead. But I think what it does do, is it makes it harder and harder for the smaller companies to compete. So the Sharps and the Kyocera-Mitas and the Toshibas, as MPS becomes a bigger part of the overall market—and Lexmark as well I would put in that camp—they’re just not going to have the software and the services capabilities to really provide the same kind of level of offering that an HP or a Xerox can.”

Cross explained that determining the companies that are leading, behind HP and Xerox, is a difficult task.

“I can say the top couple, and then it gets a little shaky,” said Cross. “I would say Xerox, HP, and then you’ve got Ricoh with IKON and you’ve got Lexmark in there, and then Canon’s trying to do some things. But it falls down pretty quickly.”

“My take on it is that, basically, the strong are going to get stronger.”

Other problems exist when analyzing growth rates. Due to the extreme differences in company sizes, growth rates may not be a useful metric to measure success in the market.

“It’s the law of large numbers,” explained Cross. “Xerox may be growing a little slower than other people, but it’s because they have the most revenue. My take on it is that, basically, the strong are going to get stronger. So HP and Xerox are probably going to outperform everybody else as they gain share. Printing in general is either a flat, slow-growing, or slowly declining—it’s generally a flat kind of pie and so everybody is fighting for chunks of it, and I think Xerox and HP are going to find growth by taking share from others.”

Mergers and Acquisitions

The mergers and acquisitions that have taken place over the last several years have left significantly fewer major players in the industry.

“We’ve had a number of the large dealers in the last couple of years be acquired,” said Cross. “So you had IKON with Ricoh, and Danka with Konica, and now Océ with Canon—the Océ / Canon one also has some technology implications for Océ’s high-speed printing—but in terms of distribution, clearly that was one of the acquisitions. I think you’re now at a point where you don’t really have a lot of independent dealers out there, there are clearly no more public ones, but a lot of the large ones have also been scooped up. I think you will see a number of smaller dealer acquisitions, but the large multi-region or national players have already been acquired.”

Cross explained why acquisitions between OEMs are unlikely. “Between OEMs, I don’t really see that happening. One of the things about printer companies is they’re very hard to kill,” Cross said, “because you get this install base, and it generates a lot of profit, even if the top line is not growing and you’re not selling a lot of new product. They can last for a very long time without really needing to make a change, and I don’t really think there’s any company out there right now that’s imminent to go.”

With few public dealerships remaining, you can expect to see different types of mergers and acquisitions in the future.

“From a software standpoint, I absolutely expect that there will be small software acquisitions that are made,” said Cross. “Again, these will all be private companies, because there’s not a lot of public companies left in this space.” Cross said that she expects Xerox, HP and Lexmark to make acquisitions in this area, but noted that it would be more difficult for Lexmark, because they don’t have as much cash in the U.S. as they used to.

In addition to software acquisitions, services companies may also be a target for the top MPS players.

“You had Xerox buy ACS, which is a business process outsourcing company, so basically they do things that have to do with documents,” said Cross. “Those types of acquisitions actually make some sense, and in talking with Canon and some others, I think it is an area people are looking at. Because again, printing in general is flat to declining, in terms of revenue—clearly a huge cash generator—but still there’s not a lot of growth. So people need to figure out what you do with the cash and how you reinvest it, and I think acquisitions will be part of that.”

Ricoh and IKON

One recent major event was Ricoh’s acquisition of IKON. Cross discussed how this will impact Ricoh’s participation in the managed print services market.

“The good thing about IKON is it does bring the national reach that Ricoh will need in some of the enterprise-level accounts.”

“I think Ricoh is an interesting one, because they purchased a number of direct assets in the early 2000s and didn’t really do a lot to integrate Savin, Lanier and Gestetner, and now they’ve got IKON there, so they’re working on integrating that on top of RicohDirect,” said Cross. “It’s been a couple years now, but it’s still a pretty big undertaking just to integrate the assets. The good thing about IKON is it does bring the national reach that Ricoh will need in some of the enterprise-level accounts. IKON played in the large accounts, but they weren’t one of the leaders. They were definitely more of a competitor to some of the smaller distributors. I think it gets (Ricoh) some part of the way there, but not substantially there.”

To compete with the likes of HP and Xerox, companies like Ricoh will need a variety of resources and capabilities at their disposal.

“If you look at Lexmark’s recent acquisition of Perceptive Software, or some of the software that HP and Xerox have put in place, there are a lot of capabilities that are going to need to be added to people’s portfolios in order to really effectively compete in an MPS world,” said Cross, “and I’m not sure that IKON really had a lot of those coming out of the acquisition. I think that it’s still a work in progress.”

Canon and Océ

Although Canon’s acquisition of Océ is not yet complete, it is one step that Canon has made to increase their market share.

“Océ I think was probably even arguably a little further behind (than IKON) in terms of MPS,” said Cross. “Océ’s U.S.-based assets were Imagistics, which was a fax machine company that had migrated over time into copiers. Their real bread and butter was the SMB market, as opposed to more up in the enterprise. SMB tends to be more of a hardware sale, or a hardware transaction, relative to being some sort of a services or solutions transaction. So I think there’s a long way to go there.”

In the footsteps of other OEMs, Canon is prepared to put a stronger focus on their channel. In this area, Cross explained that Canon has a lot of work to do to catch up with their competitors.

“I know Canon USA is focused on trying to deliver out to the channel in the second half of this year. It’s just going to take a long time, because this is a more complex sale, it’s a more complex offering,” said Cross. “You want to make sure—if your channel is offering software and solutions targeted to various verticals—that the same level of quality of offering comes from one channel partner versus another. Without a direct oversight, it’s more difficult.

“I think, Canon USA has—and it’s one of the reasons why I don’t have them sort of in the top with Xerox and HP—is that they have a lot of work to do with their channel, to educate them on MPS, to get them out selling MPS, but even just, in general with their channel, to work on integrating in the Océ acquisition. They haven’t purchased Océ yet, they only own 85 percent of it. So they haven’t even closed that acquisition, and I don’t believe it will close until sometime first quarter of next year, if they can convince the other 15 percent of shares that are out there to sell and to allow Canon to fully buy Océ.”

Other Players

Dell recently made an announcement of their intentions to offer managed print services, but whether or not this will ever become a significant component of their business remains to be seen.

“Dell purchased Perot, which is a services company with a lot of government contracts, not printing-oriented necessarily. I think printing remains an ancillary product and service for Dell, and something that they do for customers where customers need it,” said Cross, “but they’re far more focused on the data center and on PCs. Dell’s relationship with Fuji-Xerox I think is quite strong, and they are clearly pushing their color laser printers, but again, I don’t see printing as a core focus of Dell’s.”

Although we don’t hear a lot about Lexmark in day-to-day MPS news, they remain a significant player in managed print. Their focus, however, is slightly different than that of the competition.

“I think Lexmark would argue that they do a fair amount of managed print services,” said Cross. “What they really do is they offer solutions to customers. They’re targeted at various verticals, whether it’s hospitality or industrial or financial services, education, etc. They’ve got software and processes and hardware that are all optimized to, for instance, in a mortgage company, you walk in, you have certain forms you have to fill out, they get scanned, sent to the right department, everything sort of works. You’ve got HP and others who have actually moved into that market, so now Lexmark is going to face more challenges there, but they have been doing smart printer sales, or smart printer service offerings, for quite a period of time.

“I think one of their big challenges though is going to be that HP has such a foothold from a printer standpoint in the channel that it’s going to be very hard for them to knock them out,” said Cross. “I think they had a chance last year while HP was facing a lot of shortages of printers, because Canon wasn’t able to manufacture fast enough because they had shut down production during the downturn. Lexmark took about 500 basis points of share from HP at that point in time, and HP is very adamant that they’re going to gain that share back. I think, from that standpoint, it may be difficult for Lexmark to be particularly successful in this market, but they are doing things. They bought Perceptive Software. They are trying to invest in technologies that help to give them a differentiator in their RFPs and are a way to try to take some share.”

When asked if there were any companies that might unexpectedly surprise us in the MPS market, Cross explained that the expertise required to execute managed print services is not easy to obtain, and cannot be acquired suddenly.

“You need so many resources and capabilities, and again I keep saying software and services, but it’s true,” said Cross. “It takes a lot of technology to make managed print work correctly. I think it’s really the large guys that kind of come to mind that are going to play really well in that space.

“I also don’t hear a lot about services companies necessarily getting involved in MPS—it’s more, ok, I’m a printer hardware company and I’m going to do services, versus I’m a services guy, I’m going to go buy some hardware and try to figure out how to implement it. So I don’t think there’s an Accenture or somebody like that coming from the outside looking to take share.”

Future of the Channel

With HP making the most obvious outreach to the channel, you can expect to see more of this from other major players. The strength of the channel will become increasingly important as MPS becomes more dominant in the market.

“One of the things that’s become very clear to me in the last year as I’m covering this industry is just how important distribution is,” said Cross, “because clearly, especially the more that you set these things up as three- to five-year contracts, you need to know who the customers are, when their contracts are up, when there’s an opportunity to actually go out and sell to these people, and so distribution is extremely, extremely important.

“One of the things that’s become very clear to me in the last year … is just how important distribution is.”

“The other thing that’s important to note, not to continue to harp on it, but the market’s not growing. It’s not like you just sort of throw something out there and somebody buys it and it’s really easy. It’s a tough market to be in. So anybody who has a good, solid reach into the end-user customer who can sell your products is going to be extremely valuable.”

With the major players having their attention focused on strengthening the channel and bringing new software and service offerings to the table, it will be exciting to see what managed service solutions will hit the market next.