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.

 

Extending PlayStation Plus To PlayStation Vita Could Give Sony A Much-Needed Holiday Boost

While Sony has been running the PlayStation Plus (PS+) subscription service since June 2010, it has become a lot more interesting during 2012: first, we saw the introduction of the ”instant game collection” for PS3, and this week saw the addition (at no extra cost) of PlayStation Vita games (and online save backup).

 

Effectively, Sony is turning PS+ into a high-value subscription service to exploit an extensive back catalogue of game titles by distributing them electronically at virtually no cost. This has advantages, such as a predictable revenue stream and the generation of usage data. Obviously, the downsides are that revenue from traditional sales of a game title are lost, and the rate of remuneration for third-party publishers including games has to be carefully balanced. It contrasts with Microsoft’s Xbox Live Gold service — which is basically a souped-up version of the free Xbox Live service — Sony has always given more away for free in its network

In what promises to be a tough Q4 for all videogame markets, Sony’s move could significantly boost its hardware sales and PS+ subscriptions. In terms of consumers, it’s clear that this announcement affects three key groups:

  1. Existing PlayStation 3 (PS3) and Vita owners without PS+ subscriptions. This group is probably the least affected; these early adopters probably have most titles included in PS+ for the PS3 and Vita. They may be potentially slightly miffed that so many games for which they paid full price are being given away. They are unlikely to sign up for PS+ in the near term, but they could be a medium-term opportunity if Sony adds newer titles and other benefits.
  2. PS3 PS+ subscribers without a Vita. This is the most obvious target group; effectively, Sony has cut $80 off of the cost of a Vita by bundling two of the best-known first-party titles — Uncharted: Golden Abyss and Gravity Rush. While (unlike Sony) we don’t have subscriber device profiles for PS+ users, I’d guess that 80% or so still haven’t invested in a Vita, though some of these gamers will also have legacy PSP digital downloads in their account. Conservatively, this offer could convert 10% to 20% of these owners into Vita owners in the next three to six months — especially as the third-party AAA Vita titles start to arrive at the same time.
  3. New consumers. The Vita addition makes an all-in PS3/Vita/PS+ bundle much more attractive, but it will still be a significant outlay for those who have resisted investing in the Sony ecosystem for 5+ years. While there may be some upside here, it will be fairly limited.

What else could Sony do? A couple of things may help even more:

  •  Discount coupons for larger-format memory cards. The price of memory cards for the Vita is still one of the most common complaints in user forums. Any mechanism that allows PS+ subscribers to get a 10% to 15% discount voucher for memory cards would help here. Making this a limited-time offer may also spur the buying decision. This could even tap into the first group mentioned above and help them justify the PS+ sign-up; they could save 6GBP on a 32 Gb card and still get the one or two games they haven’t already bought for the Vita. Of course, this opens up a world of hurt in terms of dealing with merchants and making sure that discount codes aren’t reused, but it could potentially boost hardware and PS+ adoption in the short term.
  • Get those physical PSP games onto the Vita. The obvious benefit that would also play to our first group is a version the “disk à digital” program (similar to the UMD passport program launched in Japan when the Vita came out) for UMD-based PSP titles: let new PS+ subscribers pick two or three of their legacy PSP games for conversion to a Vita digital copy. Again, there is probably quite a lot of work here in terms of authentication, validating the title list, etc., but if many of these titles are already available in the store, there is little downside. This could also strengthen the case for buying a Vita for our second group as well, but to be fair, the case is already pretty strong for them.
  • Offer discounted DLC for Assassin’s Creed and Black Ops via PS+ as soon as possible for both the PS3 and Vita. Looking beyond the groups mentioned above, aggressively priced hardware bundles and the new AAA third-party titles should sell some additional Vita hardware to the more casual FPS gamer, even if they’re reviewing badly, such as Black Ops on Vita. Assuming many of those buyers have a PS3 but don’t have PS+, adding discounted DLC to PS+ could push them over the edge to subscribing — particularly as those titles are unlikely to be included in the subscription any time soon.
  • Market the “great value” PlayStation message. There seems to be a definite anti-Sony feeling this holiday season: the Wii U is offering new hardware; Xbox is becoming (seemingly) the other major supported format, particularly at supermarkets / non-dedicated retail; while there’s criticism directed at Sony that the new PS3 design didn’t come with a price cut and the Vita is too expensive. Without getting into negative messaging, the value of PS+ (even with just a PS3) is probably Sony’s trump card. Spinning this with a message of “But wait! There’s more! Free quality Vita games!” could at the very least drive PS+ sign-up and probably get that Vita PS+ message out there.

The 2012 holiday season will be the final push for Xbox 360 and PlayStation 3 before new consoles are released next year. Given how radically the gaming landscape has changed over the past two years, it will be interesting to see how successful these final quarters are. It’s even more critical that the Vita makes an impression after a lacklustre launch and increasing competition from smartphones and tablets.

So, When Do The Tablet Wars Start?

The iPad is a true phenomenon, selling around 70 million units since launch and projected (by Gartner) to reach up to 169 million units per year by 2016. It has demonstrated the consumer (and, potentially, business) desire for a simpler device that delivers a fantastic media “consumption” experience in conjunction with simple yet compelling apps.

Android tablets and Windows 7-based tablets have also been around for some time, so you’d have thought that the tablet “war” would have started already. Not so much. There have been a couple of false starts: the Samsung Galaxy Tab, BlackBerry PlayBook, and HP TouchPad — the latter two briefly even outselling the iPad in certain segments/markets, but only after “fire sale” discounting — have all been heralded as serious challengers but have failed to make an impact. These were certainly no more than “skirmishes” rather than an all-out war.

The Amazon Fire made some inroads in Q4 2011, extending the firm’s e-reader device line, but this seemed to wither on the vine in Q1 2012. New devices like the Asus Transformer and second-generation Samsung Galaxy tablets seem to be better received, and Google’s own tablet may arrive soon. These will, doubtless, cement Android’s position (based on cumulative sales) as a significant second-place player. But the tablet war won’t really heat up until Microsoft hits the market with both Windows 8 RT and Windows 8 tablet devices.

Microsoft needs Windows 8 and Windows 8 RT to work straight out of the gate.

Windows RT on ARM architectures will provide a proper Metro-driven, Windows-like tablet — one better than those cobbled together with Windows 7 to try and keep business clients from buying iPads — and at a price point (hopefully) comparable with other tablet offerings. Meanwhile, if you need real Windows on a tablet with proper backward compatibility, Windows 8 tablets with x86 architectures should arrive at around the same time. Pricing on the latter is likely to start high and then trickle down as component prices drop; it’s also where we’ll see interesting “hybrid” devices like laptops with touch screens and tablets with slideout keyboards.

It’s a bold move and, arguably, one that Microsoft should have made last year; Windows RT will introduce a lower-cost iPad competitor with a good user interface (UI) and some legacy compatibility (for Office docs), but it may end up as just another Zune HD — superior to the iPod in terms of hardware and UI but gaining zero traction in the market. Similarly, Windows 8 tablets could be far too expensive; if they cost more than a decent laptop and iPad combined, it’s hard to envisage rational IT managers or brand-conscious consumers opting for the untried tablet.

Perhaps this is why forecasts from the likes of Gartner and DisplaySearch see iOS as the leading tablet platform all the way out to at least 2017, with Android only gaining ground slowly and Microsoft performing poorly (according to Gartner) or atrociously (according to DisplaySearch).

It’s too early to call a winner in the long term.

The truth is that with no international market for the Kindle Fire yet, only rumors of the Google tablet, and no pricing on details for either flavor of Windows 8 tablet, it’s too early to announce the winner of this war. Apple heads into the conflict with tremendous momentum and economies of scale, but the same could have been said of Sony, Kodak, or Atari in the past. The key questions will be:

  • Who will deliver a tablet that supports those neglected usage scenarios (transactions, work stuff, communications)?
  • What will be the difference in price points between Windows RT devices and entry-point x86 Windows 8 tablets? Will all Windows 8 tablets be “transformer” or hybrid models that have slideout keyboards . . . or will there be a mainstream, pure tablet offering based on x86 architecture?
  • How long will there be manufacturers with feet in both the Windows and Android camps? Will we see this breaking down, as per today’s “PC manufacturers” and “smartphone manufacturers”, with just a few firms (Samsung, Apple, Sony) being global players in both?
  • Who is going to explain to the poor consumer standing in a PC retailer the difference between and unique benefits of: 1) a traditional notebook running Windows 8; 2) an Ultrabook with a touch screen running Windows 8; 3) a tablet running Windows 8; 4) a tablet running Windows 8 RT . . . even before we factor in Apple devices, Android tablets, hybrid Android devices, and Chrome OS laptops!

What It Means: The Failure Of Game Retail For Publishers And Platform Owners

As discussed in previous posts, game retailers have to radically change their strategy if they are to survive on the high street, but what does this major shift in consumer buying habits and, potentially, retailers’ strategy mean for the titans of the videogame world: publishers and platform holders?

The good news:

  • More direct digital sales. A decrease in the physical availability of the product is bound to spur the (already growing) trend in digital downloads — particularly for more obscure titles or add-ons that are unlikely to be stocked/discounted by non-dedicated game retailers. The boom in indie PC games is a clear example of this already happening; boxed PC games have been a highly fragmented market prone to piracy for years, and systems like Steam have enabled otherwise unlikely titles to make it big via secure digital distribution.
  • The long-term decline of the secondhand market. As previously discussed, publishers have long considered secondhand games a thorn in their side, diverting sales from new titles — or so the theory goes. While an online secondhand market will continue to grow, the disappearance of high-street stores with lots of available secondhand titles (often shelved next to the same title, new) reduces impulse-buying opportunities.
  • A smoother supply chain. Obviously, digital sales don’t require holding inventory; in addition, much of the complexity of distribution, credit facilities, and returns will disappear if physical boxed games end up being distributed mostly via two or three massive online stores and major chains/supermarkets. However, there are significant downsides to dealing with only a few firms like WalMart, Tesco, or Amazon — see below.
  • Direct engagement with customers (or at least better information via partners). What do you, as a publisher, know about your end customer — or how many units were bought in a particular state? Perhaps a buyer is tied into your loyalty program or online service — but that doesn’t tell you where they bought from. By simplifying the supply chain and even selling digital goods directly, you gain insight into the buying behaviour of your customers and should be able to respond more quickly and effectively to their needs. Whether the big retailers like Amazon will share this information (even for a fee) is trickier; it depends whether they view the data as a revenue opportunity or a strategic advantage.

The bad news:

  • Supermarkets and multi-category retailers become the primary physical retail outlets. You may have simplified your supply chain, but when Wal-Mart becomes responsible for 50% of your title sales, you become overly reliant on its largesse. And firms like Wal-Mart and Tesco negotiate hard for discounts. A secondary consideration is that, like books, videogames will become a loss leader for multi-category stores: pull punters in with $10 off Mass Effect 3 and then sell them $200 of groceries. As a publisher, you still get your revenue, but this exerts downward pressure on price points and devalues games.
  • Online retail is still a mixed blessing. The gold rush in online shopping is largely over for most categories, including videogames. A few, well-behaved retailers dominate in multiple geographic markets; they don’t tend to discount massively and do now take part in pre-order and limited-edition promotions. But their long-term strategy isn’t necessarily obvious. Could Amazon become a leading competitive digital game distribution service? Will eCommerce (and rent-by-post) players jump into the gap left by high-street stores for secondhand games? The answer to both of these questions is probably ‘yes’.
  • A short-term spike in the secondhand market. A key strategy (as I see it) for those struggling physical stores is to up their game in secondhand and trade-in games. While long-term publishers and platform holders may be able to cut off the air supply to this market with digital downloads and a reduction in the number of physical game disks/cards, that is going to take some time. Be prepared for struggling chains to keep pushing the boundaries in terms of what they see as their right to exploit this (more) profitable segment.
  • The high-street showcase disappears. Often overlooked — especially by people who see GAME and GameStop stores as somewhat grubby holes (guilty as charged!) — is the showcase that these venues provide for new titles and new game systems — however seemingly badly organized to an outsider. 3D-based systems are the clearest example here: you can’t demonstrate a 3DS on TV or YouTube; you actually have to play with one in-person. Ultimately, this also means that videogames cease to hold a special place in consumers’ minds (just like books and music) — dedicated stores where you can browse and be immersed in your hobby/obsession, rather than just picking up the latest Call of Duty while you do the weekly food shop.

Today’s videogame market is such that both publishers and platform owners will probably benefit most from a slow, graceful decline in high-street videogame stores rather than catastrophic collapses — even if the threat of the latter accelerates plans around disintermediation.