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.

 

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