Printer ink price war may be underway; Lexmark takes hit

Lexmark is getting whacked by a potential inkjet price war.

The printer manufacturer said Monday that its second quarter results will fall way short of expectations. The company said its shortfall is because of lower operating income in its consumer business.

"This shortfall is primarily due to less than expected inkjet supplies revenue, lower hardware average unit revenue driven by aggressive pricing and promotion, some greater than expected product costs, and greater than expected branded inkjet unit growth," said Lexmark in a statement.

Translation: We're getting whacked on ink pricing and cost competition.

By the numbers Lexmark is projecting earnings excluding restructuring benefits to be 62 cents a share to 67 cents a share. The company was projecting 82 cents a share to 92 cents a share. Second quarter revenue is going to be down about 2 percent from a year ago. According to Thomson Financial, Lexmark was expected to report earnings of 86 cents a share.

Surely, part of Lexmark's problems can be summed up in two letters--HP. HP has more scale and can squeeze Lexmark margins on printers.

But what's more notable to me is the inkjet supply comments from Lexmark. As we all know, the printer sale is meaningless. The printer is only a means to get you to buy ink.

I'm sure it's not coincidence that Kodak's new line of printers (see review), which make a point to lower ink costs, has been out a few months. HP has stayed out of Kodak's cheap ink play by touting innovation. Lexmark is more comparable to Kodak and is likely to be taking a hit on an inkjet supply war. What's also notable is that Lexmark sees no relief. The company projected third quarter earnings to be nil to 10 cents a share. That's a huge blowup considering Thomson Financial was projecting earnings of 81 cents a share.

Indeed, it's a bit early to call a full-blown inkjet price war, but one thing is clear: Printing costs matter. And what's going on today in the consumer market may just spread to enterprises as well.