In the computer printer business, everyone knows the big money comes from the sale of ink cartridges.
Most of these cartridges are made by printer manufacturers and sell for a substantial premium. Some come from unauthorized sources, sell for substantially less and attract the attention of antipiracy lawyers.
Cryptography Research Inc. (CRI), a San Francisco company, is developing chip technology aimed at helping printer manufacturers protect this primary source of profit. The company's chips use cryptography designed to make it harder for printers to use off-brand and counterfeit cartridges.
"We're not saying we can end piracy, but our system is designed to recover from failure," said Kit Rodgers, CRI's vice president of business development.
Not all ink-cartridge remanufacturing is illegal--much of it is, in fact, legitimate--but pirated ink-cartridge technology cuts substantially into original manufacturers' profits.
There are three main ways the $60 billion-a-year worldwide printing industry loses money:
• Used cartridges get refilled and sold as "new"-- instead of as remanufactured.
• Cartridges get illegally replicated through reverse engineering.
• Printers get hacked or physically altered to use any type of ink.
Although solid figures on counterfeiting are impossible to determine, it's estimated to cost the industry at least $3 billion a year, according to the Image Supplies Coalition, a lobbying group formed to fight piracy and cloning in the ink and toner industry.
You can see 95 percent of the (chip's) grid and you still don't know how it works.
VP of business development,
Cryptography is a method of encrypting data so that only a specific, private key can unlock, or decrypt, the information. It's used in everything from credit cards to digital media. CRI plans to create a secure chip that will allow only certain ink cartridges to communicate with certain printers.
Although this concept isn't new, CRI said its chip will be designed for use in standard fabrication processes, eliminating the need for a special--and more expensive--manufacturing process. CRI also said that the chip will be designed that so large portions of it will have no decipherable structure, a feature that would thwart someone attempting to reverse-engineer the chip by examining it under a microscope to determine how it works.
"You can see 95 percent of the (chip's) grid and you still don't know how it works," Rodgers said. There also are other, secret elements CRI won't reveal for security and competitive reasons.
Skillful hackers can eventually crack almost any code thrown at them and then exploit it for commercial purposes. Once antipiracy encryption is hacked on a product such as high-definition DVDs, for example, it's cracked forever and the discs can be copied and played using the hack. CRI takes a different tack with its protection scheme: its chip generates a separate, random code for each ink cartridge, thus requiring a would-be hacker to break every successive cartridge's code to make use of the cartridge.
This is a platform CRI uses for testing
the security and authenticity of chips.
"We want to make sure you can't repeat the same attack," said Benjamin Jun, CRI's vice president of technology. "If (hackers) have to rebreak it over and over, it's not as good a business model."
The chip, called CryptoFirewall, is not in use in this industry yet, but it's been widely deployed in the pay-TV sector, where 25 million set-top boxes have a similar technology from CRI embedded, the company said. CRI will also soon debut a similar copy-protection feature for Blu-ray video discs. The printer technology will be available in early 2008, according to CRI.
Counterfeiting and piracy are all but impossible to eradicate, but CRI hopes to at least minimize the financial damage they cause. Today, there are 123 million desktop inkjet printers and 25.6 million laserjet printers in use in the U.S., according to InfoTrends.
In terms of making and selling hardware, printers themselves are one of the least profitable sectors. Often the manufacturers are willing to sell their printers at a loss with the goal of making money on sales of ink. Hewlett-Packard, the biggest PC maker in the world, actually makes the most profit from its printer business: 46 percent of its total earnings in the most recent fiscal quarter were generated by its Imaging and Printing Group. And ink is a key.
As mentioned, remanufacturing cartridges isn't necessarily a problem. There are plenty of companies that refill cartridges and resell them, offering many consumers and businesses cheaper alternatives to the cartridges sold by printer manufacturers.
"There's absolutely nothing wrong with that; it's an accepted part of a competitive industry," according to Tuan Tran, vice president of marketing and sales for HP's supplies business. "That is a legal competition in our minds."
About 11 percent of the money spent on inkjet cartridges and 25 percent of the money paid for monochrome laserjet cartridges goes to companies that resell cartridges they did not manufacture, according to John Shane, director of marketing at InfoTrends.
"The vast majority of that is perfectly legal. Most people believe (the U.S. market for illegal cartridges is) a lot smaller than the illegal market, say, in China," Shane said.
When faced with competition from counterfeiters, HP's Tran said, companies like HP are forced to turn to their "primary weapon" in fighting patent violations, the legal system.
"There are other folks who want to avoid the (proper) process altogether and design a cartridge to work with an HP printer," he said.
In a high-profile 2003 case, Lexmark International, the company that makes printers for Dell, took printer-supplies specialist Static Control Components to court for selling a chip that allowed Lexmark printers to accept any kind of ink cartridge. Lexmark ultimately lost the case, but it hasn't stopped others from trying fiercely to protect their business.
Just last month, HP's German subsidiary accused a Swiss print supplier, Pelikan Hardcopy, of using its patented ink formula and last week filed a separate suit claiming the company is selling remanufactured cartridges labeled as new. In 2005, HP sued another cartridge refiller, Cartridge World, for using an ink formula that it said infringed on its patents.
There are other, less litigious ways to keep counterfeiters at bay. HP uses a holographic security label on its ink cartridges to identify them as legitimate HP products.
InfoTrends' Shane also noted that the printing quality of printer manufacturers' cartridges holds up longer over time when the cartridges are used with the corresponding printers, whose technical specifications can present problems for remanufacturers and counterfeiters.
But a technology like CRI's at least has the potential to cut down on future legal fees and weed out counterfeiters early on in the manufacturing process. The idea is intruiguing to printer makers, although companies like HP say they will wait and see until CRI's chip is actually available.
"If there was a technology that enabled us to protect our intellectual property, absolutely, any company would be interested in it," Tran said.