A US-based materials and services buying group reflects the need to strategically control costs in a changing market for optical disc and Dan Daley looks at a new industry paradigm forming as Colonial Purchasing expands beyond North America.
It’s a tough world out there, particularly for the middle tier of the media services business. They’ve watched as demand for physical media products has shrunk and the largest of the international media providers have consolidated onto each other. The middle tier itself has seen its own share of consolidation and attrition, besieged both by muted demand for physical media and a pernicious global economic slowdown.
But instead of a Balkans type of reaction, in which a fractured landscape of related entities, sensing a threat from all the others, turns on itself, this cohort has found ways to apply American revolutionary Founding Father Benjamin Franklin’s nostrum that, “We must all hang together, or assuredly we shall all hang separately.”
For instance, the former American Video Duplication Association (AVDA), formed 22 years earlier and which saw the first shoots of an independent VHS, audio cassette and compact disc manufacturing base, reinvented itself in this decade as the American Independent Media Manufacturers Association (AIMMA), a digital adaptation of the original, advocating physical media for advertising, direct marketing and, most notably, corporate market applications, sectors that still buoy the middle tier today.
But in 2004, a few of this same group took a different tack, creating the Colonial Purchasing Co-Op, a co-operative buying group that set out to push back against the dramatically changing circumstances of media manufacturing in the middle, including rising materials prices and a creeping regionalism that in some ways was isolating this tier in the era before Facebook and LinkedIn.
Colonial Purchasing (the name derives from the fact that the founding members numbered 13, the same as the number of former American colonies that declared independence from Britain in 1776, and that both groups had their first official meetings in Philadelphia, briefly the capital of the post-colonial United States) has since grown to 35 member companies, including several in Europe – most recently, kdg in France and Austria, CDA Germany, Duplico in Spain, AOD in Holland and Artech in Italy. It had already expanded beyond US borders with members AOD in Jalisco, Mexico and RSB IMEDIA in Saint-Laurent, QC, Canada. Colonial announced that it expects membership to grow by as much as 20% by Q1 2012 as it expands its reach further into Europe and Latin America, with growth driven heavily by the prolonged economic downturn, compelling media makers to seek out better materials and services pricing.
At a time when the top tier of replication facilities continues to contract – Sony DADC’s iconic Pittman, New Jersey plant was the latest to shutter, in April 2011 – the group’s replicator/duplicator base remains broad, ranging from large firms such as founding member OEM and JVC America, which joined in 2011, to regional replicators like Replicopy Digital Media Center and Duplium. The presence of large companies like OEM, JVC and Technicolor underscore how critical cost-saving strategies have become for all optical disc makers.
MORE THAN PRICING
In fact, Colonial Purchasing has been about more than materials pricing for some time. The co-op’s President, Doug Franzen, points to mastering facilities such as Synchronicity and G3, as well as packaging developers and authoring houses that both purchase materials such as targets but also provide services that replicators and duplicators can utilize at the same kinds of volume discounts as raw materials purchasers. For instance, Colorado Springs-based MAM-A offers discounted recordable CD, DVD and Blu-ray discs to fellow members. They’ve added content-oriented members in recently years, including music label Rainbo Records.
As corporate, educational and promotional markets head tentatively into their own Blu-ray era, member media manufacturers have been able to access Blu-ray replication services from Austria-based kdg at a discount by virtue of the fact that all member Blu-ray jobs, regardless of run sizes, are looked at on a single monthly volume basis. (The original arrangement was with InfoDisc in Germany, but the liquidation of that company in December 2011 saw InfoDisc founder Michael Gutowski move one of the InfoDisc lines to kdg's facility.) Individually, small runs would likely not find Blu-ray replication services available domestically, but using FTP transmission of master files from the US to Europe, the operation is as transparent as if the work were being done locally, with a seven to ten-day turnaround in most cases.
Furthermore, Franzen points out, the wide range of capacities and types of services within Colonial also allows members to offload work between them, much the same as took place on the open market during the optical disc’s heyday, thus reliably and affordably levelling the loads for members at peak times during the year. (Though Franzen notes that the nature of the middle tier media manufacturing has been less vulnerable historically to peak extremes due to the fact that it’s not as heavily dependent on entertainment products, which cause workflow logjams in Q3 and Q4 every year for the largest replicators.)
“We’re operating across the entire range of the media manufacturing and distribution industry,” says Franzen, who spent 30 years as COO of South Florida-based replicator Evatone and two years as Executive Vice President of business development at replicator OEM in Charlotte, North Carolina before taking the helm at Colonial Purchasing full time in 2006. (Franzen also operates Infiniti packaging, a specialty packaging company based in Fort Mill, South Carolina, from where he runs Colonial Purchasing.)
Franzen says Colonial’s success is due in large part to the fact that it’s kept its focus narrow. “We’re a buying group, not a trade organization,” he explains, noting that it operates on a not-for- profit model, with any additional revenues being returned to the members in the form of rebates or applied to the costs of the group’s annual meeting. Revenues come in the form of membership fees: members that regularly purchase raw materials through the group pay dues at US$1,250 per year; non-buying members, which benefit from service discounts, pay US$750 per annum. Additional revenue comes from sponsorship programs that range from US$2,500 to US$25,000 annually, as well as fees from speakers and presenters at the annual event.
However, Colonial Purchasing has sought synergies with other industry organizations. It has co-located its annual meeting with that of AIMMA several times. Most recently, in 2010 and 2011 it held its meeting coincident with the Europe-based MEDIA-TECH trade group, in Las Vegas. It reflects an increasingly global view on Colonial’s part. The joint event Colonial held with Media-Tech in 2010 was the Frankfurt-based organization's first US event since 2008.
In 2012, Colonial, MEDIA-TECH and AIMMA groups will stage a co-located event in Las Vegas in April. That will also reflect how each organization has changed against the landscape of the evolving industry, with a smaller but internationally focused MEDIA- TECH synergizing with an expanding Colonial and an increasingly diverse AIMMA constituency, underscoring the increased emphasis on cutting materials and operating costs in a tighter media content environment.
“We’ve become a better fit,” says Bryan Ekus, Managing Director of MEDIA-TECH, which also recently launched the North American Replicators Association, a subgroup aimed at the media manufacturing base in the US and Canada and a strategy to expand the group’s reach beyond its traditional equipment-makers base.
“We provide trade information like anti-trust protection, while [Colonial Purchasing] offers cost savings on materials and services. We have a good presence in Europe and Asia, while they and AIMMA have a good presence in the US. We’re well-positioned to help [Colonial Purchasing] expand the buying group further into Europe and help them increase their purchasing leverage, which will also help our members, who’ll be able to take advantage of Colonial’s volume buying power. That leverage will just get better as they go global.”
A CRITICAL BALANCE
However, both Franzen and Ekus are acutely aware of the importance of maintaining a balance in that leverage. For instance, as price pressures have increased as a result of shifts in demand for polycarbonate, raw materials suppliers have either spun off their materials division, as GE Plastics did with Sabic and Dow Chemical with Styron, or shifted emphasis to other polycarbonate markets with higher margins, effectively reducing potential supply of polycarbonate needed for optical disc manufacturing. “We have to be careful as an industry on how we pressure pricing,” says Ekus. “If we push prices too hard, we’ve seen materials providers moving out of the market.”
Franzen further notes that several major Asian polycarbonate suppliers have essentially pulled out of the optical disc market due to the growing strength of general-purpose polycarbonate markets elsewhere. Nonetheless, a significant drop in oil prices in August and September and oversupply further reduced polycarbonate prices in 2011 even as suppliers dropped out. That offered substantial relief for Colonial Purchasing members after the steep price rises of 2008 through 2010, but Franzen cautions that too much of a good thing can be a problem, as well.
“As capacity increases as demand drops, the price falls along with it,” he explains. “That’s good to an extent, but we don’t want to see pricing get to a place where manufacturers can’t make a reasonable margin. “We don’t want to negotiate ourselves out of suppliers.”
Whatever savings Colonial members have enjoyed as petroleum-based products have declined in cost might be more than offset by increases in other necessary materials. Nickel, for instance, used in mastering, has continued to increase in price until very recently as part of an overall rise in commodities prices in the last year, as investors sought refuge from falling equities prices and bond yields. Franzen says he renegotiates member pricing for raw materials every three months or so on average. That allows him a quarterly hedge against price shifts in a volatile materials market.
As Colonial reaches towards the limit of available suppliers for the conventional raw materials and consumables that replicators and duplicators use, he’s also been looking into sourcing other types of basics that members can use and access discounts on. These include office supplies, ink and toner, and propane gas. As more once-regulated key services move into competitive market models, such as commercial electricity, he’s also investigating negotiating prices on overhead items such as utilities, HVAC equipment and even energy auditing services aimed at helping members reduce their operating costs.
“We’re always looking for opportunities, to find a manufacturing plant that might be able to apply its capabilities to something that our members need,” Franzen states. “What we’re doing is shifting the focus somewhat to fulfilling some of our members’ infrastructure materials needs. That’s an ongoing process.”
Specialty materials, such as bonding materials and coating lacquers, offer fewer market options. But Colonial offers those vendors a broader market that can help them level their sales over the course of a year even as it helps Colonial members gain better pricing. For Instance, Sony Chemical is a Platinum-level sponsor of the group and is the official supplier of those kinds of consumables. Process Technologies & Services has a similar though non-exclusive relationship with the group for supplying sputtering targets.
In an industry that has had a mixed record when it comes to organizations – many remember the friction between the once- dominant REPLItech trade show and MEDIA-TECH a decade ago as the optical disc juggernaut began to stall – Colonial Purchasing members seem satisfied. Mary Reeves, President of Spinergy, a mid-sized replicator in Rochester, New York, says she’s happy to see the membership grow and increase the group’s buying range and leverage.
“We save far more in discounts on polycarbonate alone than the $1,250 we spend on membership every year,” she says. “Doug works hard and does a phenomenal job. Colonial has been a bright spot in a tough industry.” (Colonial buys about 30 million pounds of PC annually, it stated in an email.) Reeves says she expects the annual meeting – scheduled for 18- 20 April 2012 at the Wynn Hotel & Resort in Las Vegas – will take on new significance now that Colonial, AIMMA and MEDIA-TECH will do it together. It’s not just about discs anymore, “though we still do plenty of those,” she quickly adds. Rather, she’s looking forward to discussing alternative digital communication and messaging formats, from flash drives to wireless. “Colonial is becoming more than a buying resource – it’s an information resource for the members, too.”
The future of media manufacturing, distribution and related products and services is still unclear. Surveys have determined that demand for optical discs, while steadily diminishing, won’t disappear anytime soon. Unit pricing will continue to decline, and that will put a further premium on cost control, and that’s where Colonial Purchasing shines.
Franzen has set a goal to hit 50 members by the end of 2012. It still remains to be seen if Blu-ray will gain traction in the corporate, education and advertising markets that are the bread and butter of many of Colonial Purchasing’s members, but he’s also been looking into new technology areas off the beaten path of media, such as how members might be able to take advantage of the nascent legislatively driven mandate to move lighting from incandescent to LED and other formats. (It’s not as far-fetched as it might appear: digital signage is a fast-growing communications and messaging market sector that could complement more conventional media formats like optical disc; several replication equipment manufacturers in Europe have also tried applying their thin-film expertise to other tangential fields, such as solar panels, with varying degrees of success.)
But as imaginative as Franzen’s ideas may be, he’s sticking with Colonial Purchasing’s core mandate. “We’re not trying to be all things to all people,” he says earnestly. “We’re just trying to be the best we can at our main mission: helping members control their costs and keep their businesses running profitably.”
