Imagine working in a printing company where you over the past many years have experienced an ever-increasing competitive situation: decreasing prices, fewer jobs, and constant pressure on performance. Being smarter than competitors is part of the daily work, and the toolbox consists of efficient equipment, a dedicated labour-force, and a constant focus on fast setup-time, low waste, high utilization of equipment, and best price on consumables. The formula for success isn't given, but hard work and a constant focus on the most important KPI's will provide you with a competitive edge that ensures efficient production, and a profit.
If you invest in a Heidelberg solution, Heidelberg can provide planned maintenance, support, and benchmark data that can help you become better, like so many other vendors. However, the data can also - and are used - to ensure your competitors with best-in-practice information. Your hard work and your results will be a commodity that Heidelberg will sell.
Are you sure that you want this?
Heidelberg delivers the evidence for this in this YouTube film. Being a consultant for your customers is, of course, more than OK. The critical issue is on what basis, and how you do your job. If you are a client in a law firm, the company will declare inability if they are serving clients with opposing interests. Heidelberg, on the other hand, has a financial interest in using best-practice-performance metrics, making money by optimizing their subscription-customers performance.
Think about that for a moment!
Most of us subscribe to one of more subscription-services and are familiar with the advantages - and maybe also some of the disadvantages, so when Heidelberg announced their Subscription model, it was for sure aligned with some of the trends we see in many industries.
Subscription-models have already found its way into a lot of different services and applications. A subscription is for most people a positive word since it implies a certain level of freedom. You can subscribe for a service when needed and terminate when not. Today many of the software solutions we are using are offered as both Subscription- and license- solutions. Software as a service (SaaS) is an extremely popular service and provide a lot of advantages to both the seller and the buyer. The buyer typically has a lower financial entrance point, and vendors have recurring revenue and eventually a higher margin on their services.
Some services have binding periods or minimum payments, others not.
When you offer a subscription service, everybody knows that eventually, it will be more expensive - compared to a licensed - one-time fee. The vendor will provide upgrades, hosting, premium support, and a whole range of other add-ons that level out the additional cost (over time). The service must be so attractive that the user will continue to pay the periodic subscription-fee time after time.
OR the price has to be so low that some may never really pay attention to it and continue the subscription year after year. The objective is, obviously, customer retention. With services such as Netflix vs. i.e. Amazon Prime, the competition gives the user the incentive to change to the service of preference.
Many of us have also experienced the convenience of car-subscriptions where you don't have fixed recurring cost but only pay for usage.
When Heidelberg introduced their subscription model, I was a bit reluctant. Was it just another way of financing a piece of hardware? Was it genuinely variable? And of course, would the model compete with equipment sold in more typical ways - leasing, cash-deals, etc. What would happen to residual values if subscriptions would be all variable or if the subscription customers went out of business, and how can a hardware subscription model hit the exact hot-spot of a customer?
All these questions are today, not answered. Some because nobody can know and some since only Heidelberg know the details of how the contracts are managed. To have a strategy where equipment becomes assets where you pay per usage is not a bad idea. In a speech at a Grafkom I/O event in Sweden, the British Consultant Chris Jordan told the audience that inkjet devices are so expensive to develop that the business models around these machines have to change. He was suggesting a model where the machines are financed solely through the usage. This will require the vendors to have long-term development of platforms rather than equipment exchanged every X year and deep pockets to finance the hardware.
Look at HP - they may not finance the machines this way. Still, since the last two Indigo-generations, they are offering their customers the opportunity to upgrade hardware/software to the latest generation, enabling a longer investment horizon.
With the Heidelberg subscription, the promise is variable cost - at least in the presentation by David Schmedding from Heidelberg. The reality may be different since the customer-presentations we have seen aren't much different from any other financing deal.
Heidelberg keeps pushing headlines like "
Pay per Use", but it's not true. In their marketing material, Heidelberg states the following "You pay a fixed monthly rate for an agreed print volume." That is per definition NOT "pay per use.", so watch out.
They even claim that you don't have to enter into "capital-intensive investments in the machine." - However, we have seen offers, and if you estimate a machine to a value of ca. 2 million Euro, you calculate an interest of 2% annually, you have an initial payment, and your annual fees as part of the Subscription is a mix of assets (which you won't own), consumables, service, software, and all account up to a residual value of approx. 25%, etc., there is no difference. You effectively pay the same as before, and it's impossible to see any advantages for you as a customer. You will even have to look into five-year schemes rather than normally 7-10 years depreciation times.
The purpose of this deal is to increase Heidelberg's revenue by adding more services to their hardware/software/service business - and the cost for printers are for the ones we have checked - NOT very attractive.
Before going into details about the actual subscription model, we have to look into a more genuine issue with hardware as a subscription. When you offer software as a service, the development cost is the same whether you have one or a thousand subscribers. The use of software, in general, also become more and more valuable for a company. The software may not become more and more valuable, but the content becomes indispensable. All hardware has considerable costs involved and obviously has to be covered somehow. The value of the device also becomes less worth over time - as with all technology.
If you acquire a printing press, you will typically use a full-cost model, where you assume utilization, financing, depreciation, interest, residual value, and combine this with the variable cost from labour, blankets, ink, and other consumables.
Heidelberg offers four different subscription models where the price and the way paid depends on what service-level the customer require. All of the four models include consumables and service. Consumables, according to the before-mentioned customer-presentation, has a yearly close to the price of the hardware itself - when the annual volume is expected to be around 30 million sheets. We have during the research of this article consulted with different printing companies and industry people to judge the numbers.
Based on a 28-32 million sheet offer, the ink price is somewhere between €4.00-4.25 per kg. for ink and €1,80-2,10 per kg. for coating.
Looking at the Heidelberg presentation, it becomes clear why the consumable business is important. First of all, it's a recurring business, but it's also a high-margin business. If Heidelberg can convince enough customers to become subscription customers, Heidelberg will own a considerably higher part of the value chain and effectively separate Heidelberg from a hardware business under pressure.
Whether Heidelberg is competitive in the consumable market is another question that I will let you judge for yourself. As you may remember, Heidelberg already announced in an early pre-drupa statement the intent to offer a digital market-place with consumables - even paper. For now, it may be postponed, but most likely not forgotten.
The premium-offer from Heidelberg includes hardware. If you offer a hardware subscription-model as Heidelberg does, some assumptions must be entered into the model, to give a reasonable estimate of the cost. That leads to some critical considerations like, who is paying for the over/under- performance? If you pre-calculate several million sheets and you only reach a fraction of this number, the calculation won't add up. We know that some printers can be tempted to suggest a more favourable volume into the spreadsheet than actually performing, so the question is important, and one that is essential for customers choosing to subscribe.
Since all models include consumables, this is a competitive parameter you may not want to leave to one supplier in a five-year contract. The consumable-price can end up cost you your competitive advantage and higher prices in general.
Some may argue that consumables are also part of click prices with digital printers, and that's of course, true. However, your click covers both services, consumables, etc. and you can't buy consumables from other vendors and use as part of your competitiveness. So you don't have any advantages by not choosing your vendors solution - completely different from being locked to a supplier, in a market with multiple options. So when Heidelberg is adding consumables to their Subscription, they essentially eliminate your option to negotiate better prices on consumables. This is, of course, something to have in mind, but there are even better reasons for having the option to shop your consumables, namely quality. I don't know if Heidelberg produces their consumables or they only brand these, made by other producers. I, however, know that people experience changes in, i.e. the inks from time to time, indicating more suppliers with different formulas. You could also be in a situation where you have specific requirements for your inks that you can't get from Heidelberg, so the freedom to choose your suppliers may be very important in your business.
In a comment from Ulrich Hermann on LinkedIn, he claims that Heidelberg charges a lower pricer per sheet and that the optimization potential delivered by using Heidelberg's consultants and the benchmark data is where both Heidelberg and their customers make money. Ulrich Hermann was till March 30th 2020 CDO and member of the executive board for Heidelberg - and in this story, more importantly, father to the Heidelberg subscription model.
In the presentations, we have seen, we haven't been able to see the 'variable' cost that both David Schmedding and Ulrich Hermann speaks about. However, in the presentation, Heidelberg themself refer to a fixed monthly cost + the variable cost. However, the Subscription itself seems to include the number of sheets that are the baseline for the Subscription.
First of all, that doesn't make sense, since the papers we have seen don't imply any incentive to the subscription cost that covers the base print volume. However, several people from Heidelberg declare, in several videos on YouTube, that Heidelberg uses benchmark data from all their connected machines to achieve the optimization.
Think about that for a second. You have invested in a Heidelberg machine. This is connected to Heidelberg, and it sends data to Heidelberg about its performance. Heidelberg will get a pretty good idea about how printers are utilizing their equipment. If Heidelberg starts using the data (even if the data is anonymized) to monetize from other customers best-practice, the advantages of being clever and smart totally disappear.
To use other users benchmark data to monetize from, in itself maybe not illegal, but the moral compass is completely misaligned, and I can't believe any printer have signed up for that deal?
Heidelberg will have an incentive to find financially stable customers, with volume, and underperformance, and then use the data and consultants to improve the customers business, and this way make money on competing with the best in class printers. The effective printers connected to Heidelberg will essentially give Heidelberg performance benchmark data that Heidelberg would never be able to gather any other way.
Earlier I mentioned the production hot-spot. The problem with full-cost models is that they only work well if the assumptions are right? If you calculate the cost based on, i.e. 30 million sheets per year for a fixed price, you can easily imagine what happens if you produce less than 30 million? In the Heidelberg model, Heidelberg seems to have taken into consideration the over-performance of sheets (like normal leasing agreements). But I can't see for underproduced numbers, and this is exactly the problem with hardware as a service. If you underperform, YOU pay the price. If you overperform, you ALSO pay the price since Heidelberg will take their share of this.
In the Heidelberg subscription, they deliver what seems to be a price per sheet. It's not. It's just a number based on the total cost of the machine and the consumables divided with the number of sheets. For an XL-106-5 colour machine, the numbers speak their clear language. It will cost you close to 600.000€ annually for five years. This cost does not include plates and some spare parts - like, i.e. rollers. It does include service, spare parts, ink, coatings, and other press-room chemicals. The price may be good, or bad - the real issue is whether you pay month after month based on the assumed volume or you pay the actual volume.
Visualizing the price per sheet will make it easier for a customer to compare. With faster and faster digital equipment like inkjet printers, etc. eventually, these printers will be competitive. All the inkjet vendors can now start calculating the cost per sheet easily. If you have a printing company with a certain volume, and a lot of makereadies the math becomes easier - and I wouldn't be surprised if TCO of inkjet devices will soon be lower than the offset models delivered by Heidelberg.
Exciting times and Heidelberg for sure doesn't make it easier for printers. Using terms like Subscription in this modified and distorted way, variable cost like pay-per-use don't compute, and the Heidelberg model, is simply not something to recognize. The fact that data from best-in-class is used to monetize and optimize competitors would scare the shit out of me, and is simply nothing that builds trust - to be honest.
Most are, most likely, aware that Heidelberg dismissed the Primefire platform and the VLF offset machines in a recent statement. Heidelberg is also revising, their less than two-year-old strategy, these days. However, as mentioned in the previous article, CEO
Hundsdörfer is confident that Heidelberg in just three years will be a financially sound company and a beacon in the printing industry. Hopes are not always enough. A clear strategy and of course execution of same is extremely needed. Heidelberg eventually expects to have 30% of revenue from subscription customers. With a current revenue around €2.5 billion, 30% is around €750 million, and IF the presentations, and numbers we have seen are representative that equals between 1.000-1.500 customers (premium subscriptions). According to Heidelberg, they are on plan with their roll-out. However, all numbers are pre-corona time, which even Heidelberg couldn't take into account.
If they can deliver, the model is most likely very much supporting Hundsdörfer vision, but the cost? Well, if the industry accepts harvesting data from best-in-practice printers can be used to substantiate the value for Heidelberg's subscription business, we will see a totally different offset market with less competition since every printers metrics will be based on similar performance indexes in the future.
Part 1
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