HP and 3D Printing: The Next Big Thing or Paper Tiger?

If there was a heavyweight contest for what is the hottest IP-hi tech subject, the two most likely leading contenders would certainly be patent trolls/NPEs, in

one corner, and 3D printing, in the other. Without choosing between the two, permit me to focus this time around on 3D printing. I have previously considered, here, whether the current structure of the industry, dominated by 3D Systems here, and Stratasys, here, each of which is seeking to become a large tent, if not a one-stop shop, for 3D printing products (and even the materials required), would be disrupted by the entry of a major hi-tech behemoth, which would seek to leverage its overall hi-tech market position to grab a share, if not more. That would set up a potentially interesting clash of branding approaches: while 3D Systems and Stratasys will each continue to seek to carve out an identity as the 3D printing brand of choice, one or more hi-tech multinationals will attempt to extend their overall goodwill and name in the marketplace to capture at least a part of the 3D printing industry.

A material salvo in this direction was shot in this direction late last month, when HP indicated that it was about to enter the 3D printing market. Despite what appears as a bit of a public relations mis-step (it is reported that HP CEO Meg Whitman first stated that the announcement would come in June, but corrected herself a few days later in a blog post, stating that the announcement would come only by the end of the company’s fiscal year, October 2014, here), the upshot is the same—HP appears to be determined to enter the 3D printing field. Few details have been given about what HP is really up to in the run-up to its October 2014 launch. Morsels of information have focused on the claim that HP has finally solved a number of unspecified technical issues as well as a declaration that the first market of interest will be the enterprise market. Against this, a particularly interesting attempt to explain the what and why of HP’s announcement appeared on 28 March on Forbes.com, “Why is HP Entering the 3D Printing Industry?”, here.

According to the piece, the primary reason why HP is entering the 3D printer market "is because a host of core patents such as apparatus for producing parts by selective sintering have either expired or are expiring within a year.” Followers of the industry are aware of this and there have been various views on whether this portends a patent cliff, at least for the incumbents. From the Forbes.com perspective, the effect of the expiry of this first generation of patents seems to be that HP can cherry-pick the information soon to enter the public domain and to leverage its advantages to better exploit this soon-to-be freely available technology (more on this point again below), without having to commit massive R&D funds in this direction. Whether this is so, or whether the patent landscape will more be incremental than that, remain to be seen. Be that as it may, the Forbes.com article also suggests that, together with the expiry of these so-called core patents, HP has made significant progress in reducing the cost of consumables (it should be remembered that the materials to be used in the 3D manufacturing process, and the “razor-blade” business model that is inherent in the sales of these materials, are too often overlooked though commercially central to the 3D industry). As well, HP is reported to have progress in the quality of the additive “print” output as well reducing the printing time, which makes 3D printing less attractive for more batch-like manufacturing.

The article’s attempt to explain why HP’s announced foray in 3D printing will be good for the entire industry is interesting, if not fully convincing. First, the article argues that the mere fact that a major hi-tech multinational company will soon be entering the market “add[s] some momentum to a fledgling industry that is dominated by smaller players and could help counter criticism that the technology is still too immature for widespread consumer adoption.” This is a version of the well-established business management notion of “complementary assets”, here, whereby it is not usually the technological pioneer that ultimately succeeds commercially, but rather the company with manufacturing, marketing and distribution clout. Of course, given the fact that the first generation of patents is reaching expiry, it is a bit of an analytical stretch to refer to 3D Systems and Stratasys and their ilk as freshly-minted pioneer innovators. In any event, whether the presence of HP will give more “gravitas” to the entire industry remains uncertain.

Secondly, Forbes.com points to HP’s “deep pockets”, which “can easily fund any R&D to improve future processes or ink (plastic filament), which costs anywhere between $25 to $45 for a kilogram depending on the quality and manufacturer.” Here, too, whether the mere fact that HP has deeper pockets than smaller rivals such as 3D Systems and Stratasys has not heretofore enabled HP to take a lead role in the 3D printing industry. It is one thing to have the financial means to fund research, but it is quite the opposite to be certain that such R&D will translate into solid and stable national growth. Thirdly, as mentioned above, HP is placed to exploit its distributional channels and other complementary assets, at least in the enterprise space. Finally, even if materials continue to constitute a lucrative part of the 3D printing field, the ability of HP to migrate from its prominent position in the traditional 2D printing world to the quite different requirement of the 3D printing environment is also still an open question (interestingly, a recent radio interview with a fund manager devoted solely to the 3D printing industry failed to mention the HP announcement at all).

Indeed, an early indication whether the mere announcement that HP will enter the 3D printing area will be good for the entire industry can be measured by the direction of the stock price of both 3D Systems and Stratasys since the initial announcement by HP CEO Meg Whitman on 20 March 20. As can be seen from the attached, here and here, the stock prices for both companies have notably declined at the time of the original HP announcement and have wandered even a bit lower since then. Whether this decline is due to the HP announcement or to other factors remains an open question (indeed, the fund manager interviewed seemed to suggest that analysts have been down on the entire 3D printing industry lately and this has affected share prices). Still, the decline is food for thought. The ability of these companies to continue to dominate the industry in the face of HP’s announced entry will no doubt be the subject of intense continued interest for a long time to come.

3D Printing: A Couple of IP Aspects You Probably Have Not Thought About

As of late, few hi-tech topics have captured as much interest as has 3D printing (aka 3D manufacturing or additive manufacturing). It is not surprising, therefore, that the IP aspects of 3D printing have attracted increased attention as well. In the main, the focus has been on copyright, design and trade mark issues with respect to the potential use of production files by end-users, and on patent rights in the 3D printing machines. However, it seems to me that there are two IP issues that have enjoyed far less coverage, despite their potential commercial importance, namely the branding of 3D printing manufacturers and IP protection of the manufacturing materials.

As for the branding issue, it is connected with the current structure of the industry. Two US-based major companies appear to dominate—3D Systems, here and Stratasys, here. Both have parlayed internal development with aggressive acquisition activity which is intended to achieve industry consolidation. Indeed, Stratasys has been particularly active of this in late, having merged with the Israeli company Objet in 2012 and in June 2013 having purchased the Brooklyn-based company MakerBot, here. There is no single technology for 3D printing, which in part explains the interest by both companies in acquiring various technologies in the field, when available and where appropriate.

But even more than that, as has been explained to me by someone close to the industry, the goal of both companies is to bring a variety of such technologies under its house brand, thereby enabling a potential customer to come to rely on the brand as indicating a one-stop shop for all of his 3D hardware manufacturing needs. As Landes and Posner argued in their oft-cited article, "Trademark Law: An Economic Perspective",Journal of Law and Economics (vol. 30, no. 2 (Oct., 1987), pp. 265-309), the major economic function of a trade mark is to reduce consumer search costs. If each of these two companies can develop a strong house brand for 3D printing products across a wide range of uses, price points, and manufacturing capabilities, customers will be more likely to eschew a detailed investigation of smaller purveyors of 3D printers in favour of simply turning to one these two companies, secure in the belief that one is likely to find whatever he is looking for.

However, it seems to be only a matter of time before one or more multinational companies (such as GE or maybe even Kodak(?)) will make concerted efforts to enter the field in a commercially meaningful way. When this happens, a particularly interesting branding struggle may well then ensue: in this corner, the entrenched market leaders in the 3D printing industry, each identified by its house brand and, in the other corner, one or more or multinationals, each of whose powerful brands covers a swathe of technology and industrial companies, but which currently have a only a limited presence in the 3D printing industry (unless, of course, a multi-national simply acquires one of the 3D printing leaders, but then allows the acquiree to continue to trade under its house mark and brands.)

The issue of IP and 3D printing materials derives from the economics of the industry. At present, the current business model of the dominant 3D manufacturers appears to be a version of the model that has characterized the 2D printing industry. Thus a 3D manufacturer can sell any given device only once but, in order for the customer to make use of the machine, he must also purchase the material that enables additive manufacture to take place. The sale of the material portion of the 3D printing process is therefore a critical source of recurring income.

As summarized in a 7 September 2013 article in The Economist ("3D printing scales up"), one of the current drags on widespread reliance on 3D printing is that the cost of the materials needed may reach a price of $80 a kilo, as compared to $2 a kilo for materials used in mass manufacturing. However, the reason for this wide disparity of price is not only the high requirements for purity and composition needed for 3D printing; it also is explained by the current way that the industry is organized. Thus, as the article explains:

"But mostly it is because 3D-printer manufacturers require users to buy materials from them and mark up the price, as with the inks for 2D inkjet manufacturers. Mr Vicari [Anthony Vicari of Lux Research] thinks this strategy is not sustainable long term as third-party suppliers enter the business. Moreover, some big manufacturers, like GE, are developing bespoke 3D-printing systems which are not dependent on a single supplier of equipment or material."

Against this backdrop, it would seem that being able to continue to reap substantial profits from 3D manufacturing materials is essential to the industry as it is currently structured. Can IP play a role here? It is my understanding that, at the moment, manufacturing materials are currently protected primarily by trade secrets. As we all know, this kind of protection is intended to prevent unauthorized disclosure, but it does nothing to prevent competitors from coming up independently with equivalent materials. If 3D printing manufacturers face waning control over sale of the materials, might not patents come to their rescue? I frankly do not know the extent to which patent protection is appropriate for 3D printing materials. But if it is, then perhaps the manufacturers might be able to prevent the possible erosion of their profit margins in the materials by being able to assert patent rights (even if merely to sign up third-party licensees). It will be interesting in this context to see if there will be enhanced acquisition of companies specializing in developing 3D printing materials and an increase in patent filings in this area.

Jackie Maguire (in 2D) on 3D

IP Finance's friend Jackie Maguire (CEO, Coller IP) has been interviewed by the BBC on the increasingly interesting field of 3D printing.  If 3D printing lives up to only a tenth of its hype and quarter of its technical potential, it can easily be the biggest proposition to affect the IP-finance interface since the internet and web-enabled portable devices, as it (i) absorbs increasingly large proportions of available R&D and marketing funding, (ii) forces manufacturers, suppliers and retailers of 3D print-friendly products to evaluate, amend or abandon existing business models and (iii) raises familiar issues regarding the search for industry-wide standards and the technologies of compatibility, in which the demand for return on private investment, the need for competition and accessibility of markets to new entrants, come increasingly into conflict with one another.

You can enjoy the interview here.