Lexmark's books are still in the black, but the market saw red anyway. Growth is down, which is not a forgivable direction in a market going in the other way. Digital photography and broadband access have warmed up consumers to colour printing, but aggressive pricing from HP has hit Lexmark hard. It's also not too happy on the way independent ink jet cartridge manufacturers have grabbed a chunk of the refill market.
You can make an awful lot of money from consumables, but you have to play it right. The classic model is Gillette, which uses a combination of technology, design, marketing and distribution savvy to wrong-foot its competitors and extract premium prices from its customers for stuff they'll throw away. Everything Gillette does adds perceived or actual value to its products, or cuts costs without affecting the end result.
Lexmark, on the other hand, tried to protect its market by chipping its cartridges and then forbidding the production of compatible products. There was the usual spiel about ensuring consumer satisfaction by outlawing inferior products: the way to do that is through the brand, not the courts. The courts agreed, saying that reverse engineering for interoperability is explicitly allowed. Meanwhile, the consumers are happy to make their own decisions based on price and quality
Talk to any printer company, and you'll get a great tale of enormously expensive research and development, followed by sadness over the way third parties leap in and freeload. We feel their pain, but a business plan based on customer lock-in rather than superior products is dangerous even when that lock-in can be enforced.
Sony's attempts to reinvent digital music in its own image by excluding the MP3 has hurt the company far more than it has impacted its competitors: consumers are frequently brighter than marketing people assume. And a company that can contentedly gorge on its customers safe in the knowledge that they can't go anywhere else is a company that will become reactionary and lazy.
If your products are good enough and your marketing and business model are up to snuff, you won't need lock-in. If your business depends on it, your products are unlikely to be competitive in their own right — no matter how expensively developed — and the competition will get through the barbed wire in the end. Lexmark isn't the first company to learn this lesson the hard way, and we very much suspect it won't be the last.
