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Digital printing makes its own mark

Throughout 1998, investors wondered how to play the market in digital imaging, as animated movies flooded the silver screen, and gadget-hungry consumers snapped up digital cameras. But I think 1999 will prove to be a better year to invest in the industry, especially in the area of digital printing.

Throughout 1998, investors wondered how to play the market in digital imaging, as digitally-animated movies flooded the silver screen, and gadget-hungry consumers snapped up digital cameras. But I think 1999 will prove to be an even better year to invest in the industry, especially in the area of digital printing.

Imaging and printing--whether we talk about film, photography, or publishing--have long been areas where the cost and performance advantages of digital processes have not yet displaced traditional equipment and methods.

This is beginning to change, however, as the compelling advantages of lower cost and higher quality associated with digital technology in other applications are recognized. Just as digital music CDs replaced analog LPs, I believe it is just a matter of time before film becomes digital bits, presses turn into lasers, and printing plates become quaint artifacts. These changes may be just around the corner.

The biggest opportunity, I believe, is in digital photography--but mass-market adoption remains some one to two years away. The cost and quality of the technology are still not comparable to traditional film-based methods, and the advantages of editing, enlarging, and printing on one's own computer still don't offset the poor ease-of-use factors associated with the newer technology. And granted, it's still just a lot easier to go around the corner to the one-hour developer.

But of course, the promise of digital technology is that all of these factors improve over time, as Moore's Law applies equally to the price/performance of digital cameras.

Unfortunately for the investor, outside of a few flash-memory companies that create the medium to store digital photographs in a camera, there aren't pure-play investments in digital photography, since much of the innovation is driven by the Japanese consumer electronics and camera giants. But watch this space later in 1999.

As for digital printing, with the advent of Hewlett-Packard's laser printer in the early 1980s and subsequent advances in ink-jet technology, personal and network printing is already almost entirely digital. (Ask yourself: who uses a typewriter anymore?)

However, only recently have these digital technologies moved upscale, addressing higher-volume printing applications and encroaching on traditional analog presses and light-lens copiers--and I see this trend accelerating in 1999.

There are many reasons for this, but I can easily point to four: digital technology is driving color into the office, making shorter run-lengths more cost-effective, creating the ability to "distribute then print" vs. the older "print then distribute," and is allowing workflow efficiencies as copiers and network printers converge.

Looking at color in the office, 1999 may prove to be the year of widespread adoption of that, that will not stop until there is a color output device on every network of every floor of every office building.

Quality and cost per page have been the inhibitors to adoption to date--the benefits and user desires for color are well documented. And today the quality of mid-range color printers and color copiers is excellent, while cost per page continues to improve and will likely break the magic $0.05 number shortly.

Digital printing is also changing the way traditional publishers think, both in terms of run-length and distribution costs. Because there are low set-up costs associated with high-end digital printers (plates and press down-time) short-run lengths cost no more per page than long run lengths--opening up new potential applications.

The implications of this new cost model are profound--now publishers can distribute content electronically over the Internet and print small runs locally, saving in some cases 40 percent to 50 percent of overall costs just from streamlined logistics.

And looking forward, the promise of individualized printing, with variable content based on a single consumer's needs (i.e. a run-length of one) will change everything from textbook printing to color catalog publishing.

Unlike digital photography, there are a number of public companies associated with digital printing. And out of the handful that I cover, I am currently favoring two: Xerox (as of January 7, 1999, trading at 121.75) and Xeikon (as of January 7, 1999, trading at 25.625).

Xerox has streamlined its products and focus and today is dominant in many of the themes I have touched upon, which will likely accelerate the company's growth in both 1999 and 2000.

Its high-end DocuTech product has been the key factor behind the growth of on demand black-and white publishing and the company's strong world-wide sales force is poised to drive similar growth in color copying and publishing. Digital copiers are replacing analog copiers and enabling network printing--today the company's digital products outsell its traditional analog product--a trend which will only become more pronounced in the future.

Xeikon is a smaller company, with estimated revenue of $137 million in 1998, but is entirely focused on high-end digital color printing. Xeikon designs and manufactures the engine and paper handling technology for high-speed (up to 100 impressions per minute) color digital presses, which I believe is the leading technology. Companies like IBM, Xerox and Agfa are OEMs. I see the company participating in the strong growth of the market with annual revenue growth of 35 percent to 40 percent over the next few years.

BT Alex. Brown Incorporated maintains a net primary market in the common stock of Xeikon. Within the past three years, BT Alex. Brown Incorporated or a predecessor has managed or co-managed a public offering of Xeikon. A director, officer, or employee of BT Alex. Brown Incorporated serves on the Board of Directors of Xerox Corporation.

Rueppel is a research analyst with BT Alex. Brown Incorporated. This column is not a publication of BT Alex. Brown Incorporated and may not represent Rueppel's complete or current opinion with respect to any company. Persons who want to make an investment decision with respect to any company mentioned by Rueppel should obtain a copy of Rueppel's current and complete opinion as contained in the most recent publication of BT Alex. Brown Incorporated. Rueppel's opinions are not intended as an offer or solicitation, nor as the basis for any contract for the purchase or sale of any security, loan or other instrument.