Can the Consumer Electronics Industry Regain Its Former Glory?

It’s been a rough few years for those firms selling consumer electronics; the lack of new formats and technology advances combined with razor-thin margins and increased competition from non-traditional competitors has taken its toll. Philips has finally thrown in the towel after years of struggle; Sharp is on a knife-edge; Sony has recently stemmed its haemorrhaging of money but is still making a loss; and Cisco has given up on its consumer aspirations.

What has caused this massive decline? Consumers are still buying “technology,” so someone is doing well. Why can’t CE firms compete?

  • “Hi-fi” and audio/visual component are obsolete. For many consumers, A/V components have become redundant. Low-quality MP3 files broadcast through dock speakers or [shudder] mobile phone speakers seem to be good enough for many consumers, particularly Millennials. Headphone manufacturers also do well out of this — Beats, Bose, and Sennheiser dominate — but again aren’t the CE giants.
  • TVs just don’t make money. Most households now have at least one large flat-panel TV and probably still watch predominantly standard definition content on it, so why upgrade? 3D hasn’t been the miracle cure that many manufacturers hoped for, and 4K resolution TV is still several years out from the mainstream. Even worse, when firms sell TVs, they often lose money; the margins are slim, shipping is expensive and retail stock is often discounted / returned.
  • Content has starting flowing across multiple devices. More importantly, new competitors like Apple, Microsoft, and even Amazon have stormed the market with newer, digital, connected devices that often have supplementary business models (iTunes, Xbox games, etc.).
  • It’s the economy, stupid. As chains like Best Buy and the UK’s Comet have discovered, it’s not just that consumer preferences have shifted; people are laser focused on reducing those big-ticket discretionary items. New TVs, appliances, and holidays — for which people often bought new cameras, MP3 players, and portable media like DVD players — top that list, unfortunately.

Can CE firms recover? There are two schools of thought here.

No they can’t:

  • Big-ticket, one-off, branded CE purchases are a thing of the past. Future consumer technology purchases will tie into an existing ecosystem far more than in the past. As such, those firms that own that ecosystem — Apple, Amazon, Google — will increasingly call the shots in terms of hardware.
  • Enthusiasts have moved on to Kickstarter and homebrew hardware. While there is still a market for niche hi-fi — firms like Sonos do quite well — this is a shrinking market consisting of consumers who buy a new turntable twice in their lifetime. More damningly, those hi-fi and electronics buffs who in the past would have supported new ideas from the likes of Philips or Sony increasingly look at interesting kit from Kickstarter projects or even put together their own hardware with homebrew equipment like the Raspberry Pi.
  • Scale and software are beating out quality and brand. As Samsung has demonstrated, you just can’t compete if you don’t have massive scale. “Quality” becomes a somewhat esoteric argument when the vast majority of your digital components are sourced from the same firms (often Samsung!) and assembled in the same Chinese factories as your competitors. Suddenly, the only differentiator ends up being the user interface and software (and OS) — fields where hardware-obsessed CE firms have repeatedly failed to show any aptitude.
  • Flexibility trumps quality. As content travels across ever more devices, arguably at lower quality than ever before — see streaming versus Blu-ray or MP3 versus vinyl/CD — the quality of the individual hardware components matters less. Why spend $2,000 on an HD TV when you end up watching most video content via iTunes on an iPad?

Yes they can:

  • There is still a place for well-designed and well-built devices. Many consumers want devices that will last for years (without the non-replaceable battery failing) or devices that perform single functions excellently rather than many functions adequately — still the case for digital cameras versus cameras built into smartphones. CE firms have excelled at these devices in the past and have only recently become obsessed with competing (unsuccessfully) with Apple.
  • Some firms are still doing OK. If you looked at Samsung’s results, you’d struggle to see the crisis. Similarly, there are some (admittedly weak) signs that Sony has turned the corner. What we are seeing at the moment is the weeding out of the weak and obsolete — firms that didn’t move with the times or (like Philips) have better chances/margins in other categories like medical and personal health devices.
  • Delivering seamless connected experiences without all that IT is still a pipe dream. The “IT” firms — and I’d count Apple, Microsoft, and Amazon among these — that have now encroached on the classic CE firm space talk a good talk about seamless experiences and streaming etc., but many of these components still don’t work as advertised or are prone to network and copy protection issues. Classic consumer electronics, on the other hand, were engineered to work in pretty much any operating environment without the need for a detailed knowledge of how to configure your router’s firewall.
  • CE firms are still best for truly independent content experience aggregation. CE has always been somewhat standoffish about “content” — opposing blank media taxes and generally taking the approach of “consumers can do what they want with our equipment.” Ironically, this makes them the ideal deliverer of content services from multiple sources like Spotify, Netflix, Amazon, iTunes, etc. Too many of the new breed of home technology providers — especially Apple — restrict what services are available on which devices because of commercial competitive reasons. Similarly, broadcasters and content producers have a vested interest (or legal responsibility) to impose barriers (either geographic or monetary) to open content distribution.

My take is that over the next couple of years we will see a state somewhere between these two (deliberate) extremes. More firms will disappear or become mere marque brands for other firms’ products (like Polaroid or Kodak). You will also see strategic withdrawals from toxic categories (TVs, audio components, digital cameras, game consoles); while this would have been unthinkable for the boards of CE firms in the past, doing so today is an acceptance of the new commercial realities.

But you will also see great products coming from CE firms, especially as the global economy picks up and our definition of consumer technology expands to encompass environmental, home infrastructure, and wearable devices. Traditional CE firms that can work alongside the IT and social media giants — that are always going to be better at software engineering and connectivity but will fall down on hardware engineering and ease of use — have the best chance of surviving.


Sony’s PlayStation 4 – Initial Thoughts

Eschewing the usual E3 bun fight around who can announce first, Sony took the unusual step of scheduling a NYC briefing yesterday to announce the PS4. The briefing — broadcast live and watched by around half a million people on the official feed that I was tuned into — was the now-familiar mix of roving spotlights, developer testimonials, “simulated” games, and intriguing concept demos. Sony made its next-generation intent pretty clear: this is evolution rather than revolution, with the PS4 still being a powerful game-centric, under-the-TV box with physical controllers and movement-based control. Neither the price nor the geographic release window (beyond “holidays 2013”) was discussed, nor did we get to see what the box will look like. (My guess? Black, oblong, and plastic with some blue LEDs.)

While many of the concrete details were shrouded in meaningless marketing speak*, this initial peek behind the curtain reveals a number of interesting innovations:

  • Cloud and remote play take centre stage. The purchase of Gaikai last year hinted that Sony was seriously looking at game streaming; sure enough, it was David Perry who took the audience through many of the new network features of the PS4. Theoretically, all PS4 games will be available for remote play, and this technology also doubles to manage the backward compatibility, given the shift to x86 hardware. This also allows for full game ‘demos’ via streaming and the ability to start playing a game when its only partially downloaded (essential when you are talking about multi-gigabyte games).
  • A move from box-centric to game-centric experiences across multiple devices. Linked to the remote-play features is an increased focus on supporting play experiences on multiple devices. Sony would obviously like this to be the PSP Vita or Sony-branded tablets and smartphones, but there’s no reason why the device pool couldn’t be larger given the firm’s commitment to Android. Android and iOS support was explicitly mentioned, lets see how the implementations pan out.
  • More “user-friendly” features. The current generation of consoles introduced some complexity and hassle to the gaming experience; suddenly, you couldn’t just flip the off switch in frustration (the game could be in mid-save) and you might have to download game patches and OS updates before you even started playing. This removed a lot of the immediacy from the “console experience” (one of the five core buzzwords!), so the PS4 aims to fix this. Obviously, in a connected world, you never actually get to “switch off” the console, but you will get instant suspend and resume. Actually Sony has confirmed that the box will work when offline – but you’ll lose some functionality.
  • More social features and personalization. The new controller has a “Share” button that allows users to pause games and upload game play (which is constantly buffered to memory). Along with the extension of the PlayStation network as a gaming social network (including the introduction of real names as well as gamer tags), this points to an acknowledgement that today’s gamers demand as much social engagement in their console games as they do when (over)sharing their photos or music taste. Add in extended co-op play and spectating, and the PS4 is well on its way to being a true social gaming experience. Personalization also comes into play here – the console will learn your online, genre and friend preferences and adjust the UI as required.
  • A more PC-like architecture. While the console price point wasn’t announced, speculation is already rife that the price will be much lower than the PS3’s launch price — maybe as low as $400. Aside from acknowledging that gamers now have far more choice in living-room entertainment, including $70 Android consoles, this is facilitated by using more off-the-shelf components like x86 CPUs and a PC-style GPU. There are still expensive components in the box — 8GB of GDDR5 memory isn’t cheap — but we should remember that when the PS3 came out, Blu-ray drives were extremely expensive components.
  • A focus on creation activities. In addition to extended social facilities, it was left to Media Molecule (again!) to add some whimsy and true user-creation opportunities to the proceedings. While still a technical demo, using the Move controller for 3D sculpting looked amazing; if tied in with 3D printing services, this could be huge. And the music-number “Play” using Move controllers showed the direction that tools like Little Big Planet could take.

Sony implicitly glossed over a couple of topics in the 2-hour briefing:

  • Physical media: What’s that? Physical media (i.e., game disks) wasn’t mentioned once in the proceedings, aside from an evolutionary discussion about how far we’ve come. It’s also clear that partnerships with indie developers, Blizzard and Bungie also favour digital distribution. So is the PS4 digital only? Of course not. As Shuhei Yoshida confirmed to Eurogamer, it will have a Blu-ray drive, which will even play second-hand games. A cynic may suggest that this is a deliberate ploy to bait Microsoft, which will probably have to acknowledge the inclusion of Blu-ray in the next Xbox (remember the HD DVD drive!) and may have plans to restrict second-hand game sales.
  • Is this bad news for E3? Why would Sony opt for a mid-February briefing rather than wait three months for a more comprehensive E3 announcement? It does mean that the PS4 gets a solo spotlight for several days and gives Sony better control of the messaging. This increasing trend for standalone, corporate-controlled unveilings (see also Apple, Google, Microsoft) is bad news for those marquee multifirm events like E3. Add to this the online demos, videos, and endless commentary, and waiting for three days in June to get your annual game news splurge suddenly seems increasingly antiquated. Of course, E3 still remains a great place to do business, but we may see a scaling back of the consumer glitz.

The elephant in the sexily lit NYC warehouse

Sony, and undoubtedly Microsoft in the coming weeks, is firmly committed to a powerful new home console — as are traditional publishers and the gaming press — but are these devices still relevant to the mass consumer? Tablet games, social games, and even F2P gaming has transformed the games industry over the past 18 months; most require only moderately powerful devices and small investments in games or micropayments (though these can quickly add up). Why buy a $400 console, $60 game, and $10 DLC to do this — albeit in higher definition and with a deeper, more immersive experience?

Of course, dedicated gamers will adopt the new hardware and seek out new gaming experiences, but the past five years has shown that the big money is with casual console gamers (see the Wii’s success) and the new types of game mentioned above. The question for Sony, Microsoft, and Nintendo is how many of those dedicated gamers there are: more than there were 10 years ago, half as many as five years ago, as many but split between eight rather than three platforms? I don’t pretend to know the answer (yet!), but there is no doubt that this new generation of consoles will face more competition, media scrutiny, and consumer choice than the three previous generations (at least) faced.

*Having core traits / buzzwords of “simple, immediacy, social, integrated, personalized” barely narrows it down; you could say this about pretty much any technology from the past 20 years!