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As appearing in The Seybold Report - Dec. 28, 2005

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.

NPES' Print Outlook 2006 Conference:
Federal Data Legislation Could Limit Variable Digital Print

The 25^th annual Print Outlook Conference drew 88 attendees to the Hilton Arlington December 1-2 to address the marketing and economic summit issues for the printing and converting industries. Economists opined the near and midterm direction of various economic indices. Consultants debated the print industry impact of trade offs of the various advertising media. Government affairs specialists offered the current status of legislation of most import to the industry and printer panelists described their transition from printers to marketing services support facilitators.

The industry has followed with interest and no small frustration the Federal legislative logjam on Postal Reform. And yet few attendees were aware of the 65 different bills being debated that address data. The printing, mailing and fulfillment industries and their associated political action committees have not really taken defined positions concerning these bills. Bruce Biegel, Managing Director of the strategic consultancy Winterbury Group LLC and direct mail experts, suggested that considering the importance the printing industry has placed upon digital printing as a future growth process they need to get up to speed pretty quick on these potential laws. This "data legislation" could have some hidden surprises relative to the use of personal data due to "security provisions" and therefore vendor liability. The use of personal information is essential to the roll out of digital variable printing.

While the personal databases will ultimately be expected to be owned by some corporate publisher, the digital printer could face unexpected liabilities as they currently do when copyright clearance comes into play. For example, college professors select articles and book chapters, many of which are copyrighted, to comprise the course pack materials sold to their students enrolled in specific courses. The laws have focused the copyright clearance liability on the printer if clearance has not been properly sought. Copyright clearance obligation may not be analogous for data legislation but then again it might be dead on. Stay tuned for topical discussions at future NPES Print Outlook and possibly Executive Outlook Conferences.

Keynoter John Engler, President of the nation's largest trade group - the National Association of Manufacturers (NAM) and former three-term Michigan governor, gave the "Outlook for Manufacturing." While the U.S. manufacturing sector is the "eighth largest economy in the world" and for the first time in five years its growth exceeded that of the United States in 2004, it is faced with three substantial challenges preventing it from competing globally on an even playing field. The first is the rising cost of healthcare. A NAM study indicated that $300 billion are spent each year on the redundant paper work in the healthcare information national structure. "Only public education is worse," commented Engler.

Second challenge is the broadening gap in new employee skills. "Eighty percent of manufacturers are experiencing skill shortages (right now)." "Manufacturers use more metrics (to measure progress) every week than any school uses in a year," Engler offered. With $500 billion being spent on education each year Engler concluded, "This is not a funding but a leadership issue!"

Escalating cost of energy is the third manufacturing challenge. No realistic national strategy exists to boost energy supply. Fifty-five percent more energy will be needed by 2025 than consumed today. Bringing back nuclear power, drilling on the continental outer shelf, bringing a pipeline down to the lower 48 states are options that must be realistically addressed. The Federal Regulatory infrastructure and approval process must be corrected. The Fed keeps changing the rules after construction is approved but before project completion which adds to costs and financial risks. China is spending $50 billion to build 30 nuclear power plants. The United States permitting time now exceeds ten years for one nuclear power plant.

Norman Ornstein, a political election analyst for CBS and resident scholar at the American Enterprise Institute for Public Policy Research, spoke on the Political Outlook. Throughout the nation, not just in Washington, "there is a virtual parity between the two parties. Consequently everything is up for grabs at every election. The 99 state legislatures have 7,500 elected legislators: 3,658 Republicans and 3,656 Democrats." The impact of a shift in control is immense at both the state and federal levels.

When the Democrats held the majority from 1954-1994, "the political philosophical differences between both parties were like a bell curve of distribution around the 50 yard line." Today's Congress has the dispersion of ideology of the two parties looking like a double humped or bimodal distribution at either end of a football field. Compromises appear extremely difficult to reach. Both parties need to "reach out across the divide," but no one seems to be stepping up to be first remarked Ornstein.

History has shown that second term presidencies, according to Ornstein, have no real new ideas and are often characterized by scandals. When the Vice President is not an heir apparent, the potential Presidential candidates become more aggressive resulting in more alienation within the current President's own party. And the implosion continues as "the riverboat gamble of Iraq plays itself out."

Frank Cost, RIT Professor of Digital Publishing and Printing, offered a personal case study based upon the publishing and production of his current book. It involves a "changed mindset" and "centered around web-based business processes." He commented that most University Publishing ventures, and private sector as well for that matter, are "money pits" because of the unpredictability of demand and unsold inventories. His book was produced both by offset and in digital print mode via Lulu.com. This Internet entity is similar to Amazon.com but offering more margin to the publisher. With unit production costs being $1.40 for offset and $10 for digital and selling price the same for both, the net publishing margin is comparable. However, the inventory carrying cost and risk of the offset version is eliminated with the digital print model.

Lulu.com is the Internet print developer who has a strategic partnership with a digital book manufacturer, in this case Rochester's Color Centric Corporation.

NPES Consulting Economist Michael Evans, who has presented at every Print Outlook, expects the Fed to increase interest rates from the current 4% to 5% by mid-2006. If inflation stays in check at around the 2.5-3% range, the Fed will be expected to decrease interest rates for the rest of the year to about 4% by this time next year.

The exception to the flat inflation will be in construction, which will peak out at +25% spike in 2006. Initially driven by the hurricane rebuilds and resulting material shortages, construction has no real economy of scale and foreign competition is not an issue. This one time bump will have little impact on the consumer price index. Energy prices have peaked but will remain high.

The growth in housing prices will back off to the inflationary pace in 2006. Some "hot spots" will see declines of 10-15% and there will be decreases in housing starts as the investment motive disappears.

GDP growth will dip to +2.5% in '06 due to rising interest rates and a stagnant stock market and then a slight rebound to +3.5% growth in '07. This relative sluggish performance is due to an overall low manufacturing capacity utilization, low corporate profit margins and more expansion overseas.

Long term U.S. inflation will stay in check despite "indefinite trade deficits" as very little of the higher energy costs will be passed through to consumers, continued high productivity gains, vigorous foreign competition (except in construction), modest wage increases in most sectors and China and OPEC continuing to buy U.S. Treasuries because of their "investment safety."

Ronnie Davis, PIA/GATF's Chief Economist, said the Gulf Coast segment of the printing industry took a $200 million revenue hit from the hurricanes this year. He expects a 2-3% printing industry increase next year despite the 5.4% postal rate hike. While printers should expect their overall costs to climb 5% in 2006, this will be offset by slight price increases and robust productivity gains. "Printer's productivity in 2004 as measured by value-added per employee increased by 7.2%," concluded Davis.

The printer panel, moderated by Davis, was comprised of four firms that clearly understand the need to transform themselves. Or as Al Kennickell, President of Savannah's 111 year old Kennickell Print & Communications, said, "We are continuing to morph." His firm has added fulfillment and mailing services and moved gingerly into digital print and database management. Each of these expansions by "incremental growth and investment" as "we're learning every day." He concluded, "I'm studying more now than since I was in college." His database management activity has been slow and sure partly as the result of being able to outsource select tasks to an IT Service Bureau in the Ukraine that he found.

Ken Chaletzky, President of Copy General in Sterling, Virginia, has evolved his firm into a 100% digital enterprise that is aggressively growing their variable data services. The success of his marketing strategy is simply described, "We've got 'em by the data."

Eric Webber, President of Rochester's Cohber Press, is experiencing high profile growth in digital printing but warned that printers need to be careful how they describe the importance of these new ancillary services to their employee base. The lion's share of employees and revenue continue to be lithography, a late model 10-unit press in his case, and the emphasis upon offset efficiency and productivity is essential.

Kennickell agreed and added that he has given up trying to train his print salesmen to be anything but excellent print salesmen. He knows his firm needs to offer more marketing support services but hopes to get his new sales representatives from advertising agencies for whom his firm does no work.

Kip Smythe, NPES Vice President and President of Printing Industries Marketing Information Research Organization (PRIMIR), gave a presentation on an initiative to arrive at common definition of terms describing the industry. This will assure that studies and projections can have some basis of logical comparison. Currently there is a range in the number of printing companies and total revenues depending upon which consultant or expert you talk with. The credibility of everyone's research is diminished when different segments, products and processes are overlapping. PRIMIR will continue to work with all interested parties to iron out differences in these definitions.

Advertising Trends in Direct Mail and Catalogs were discussed by Bruce Biegel and Bill Lamparter, President of PrintCom Consulting. Direct Mail is not as popular a marketing media in other countries as it is in the US. Biegel showed a chart that the Direct Mail revenue in the U.S. are 2.5 times as great as the second largest nation's direct mail spending. Of the $887 billion total advertising spend in the United States for 2004, direct mail has the largest share and it is consistently growing at the expense of broadcast television. Insurance, hospitality and not-for-profit are the three leading industry specific direct mail applications.

Continued market consolidation, especially among the retail, financial services, healthcare and telecom sectors, is creating realignment among buyers. Spending shifts toward accountable media and less toward the branding-oriented vehicles like TV as well as expansion of integrated multi-media campaigns is evident. Clearly complexity and sophistication is following these distribution elements as has been similarly experienced by printing projects.

Advertising agencies continue to experience severe competition and margin erosion resulting in their accounts turn over every 18 months on average. Biegel senses "a lack of differentiation between the large advertising holding companies." When the recent general advertising agency was terminated by General Motors, it was learned that GM was allowing this agency only a 1% markup on media procured. This mark up was as high as 15% a couple of decades ago.

Biegel forecasts statement or transactional printing to climb at a compound annual growth rate of 1% through 2009. While this activity is relatively stabile, these vendors must now provide e-statements and spot color in addition to the standard high-speed single color variable print. The use of statement inserts is a long proven marketing ploy which clients are expected to continue to incorporate.

Lamparter indicated that his firm's research on catalogs is showing that "some catalogs no longer list prices." This extends the usable life of the catalogs and results in sending the buyer to a website for current sales or promotional programs. The use of post cards is growing as teasers to drive prospects to the catalog and website.

Similarly Lamparter added, "Direct mail programs are universally including a postcard as one of the three elements of a fully integrated multi-media program." It is interesting that the catalog specialty printers have been the leaders at incorporating the large format Sunday presses to increase process color page count in the same signature at increasing speeds. And yet few of these specialty printers have sheetfed presses in those same plants to print the postcards.

While few printers attend the Print Outlook Conference, the information is vital to executive management planning and quite often complementary to the benchmark best practices covered by other national and international conclaves.

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.