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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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JANUARY 22, 2003 SPECIAL REPORT: THE PROMISE OF CONSUMER ELECTRONICS Home Is Where the Tech Is These days, the digital gear being made for consumers is where you'll find groundbreaking innovaton. But will anyone see profits?
By contrast, Comdex, the November computer trade show that showcases technology for corporate settings, was ho-hum. Lampooned as "Calmdex," it attracted about half the attendees it had three years ago. Practically the biggest buzz was over the possible filing for bankruptcy protection of Comdex' backer, Key3Media Group (KMED ). That hasn't happened yet, although it missed debt payments in December. "The newest technology, the coolest stuff, the things where you really said, 'Wow, that's amazing,' were all at CES, and I didn't see any at Comdex," says Brent Rusick, chief operating officer of online retailer Buy.com. STRONG-ENOUGH LEGS? That's just one of the signs that a major shift in the tech world is taking place. It's going on just under the radar of most analysts and investors, but it has become increasingly obvious to industry professionals over the past few months: Much of the truly exciting innovation in technology is now being developed for consumers. It isn't clear yet what that will mean in dollars and cents for consumer-electronics companies, as well as for the computer software and hardware makers that are increasingly moving onto that turf. That's because much of the demand for digital gear is being driven by rampant price deflation that crimps profit margins. So despite strong demand for digital cameras, ultralight camcorders, and home-theater systems, the new consumer-electronics boom may not have the legs to lift tech out of its current slump. "It would be fair to say that at the moment, consumer-tech spending is a stronger force than business-tech spending," says Tom Blaisdell, a partner at DCM-Doll Capital Management, a Menlo Park (Calif.) venture-capital firm. "But that's at the moment." SLOWER GROWTH. Moreover, in dollar terms, total consumer-electronics sales are relatively weak. Last year, they grew by 3.7%, to $96.2 billion, and the Consumer Electronics Assn. (CEA) projects a 3.5% increase in 2003, to $99.5 billion. That's still stronger growth than most forecasts of tech sales to businesses -- which range from slightly negative to slightly positive for 2003. But it's still well below the long-term growth rate of 6% for the consumer-electronics industry. The big question for consumer tech is the macro economy. With the employment outlook worrisome amid signs that U.S. consumers may be burning out, even hot new products and steep discounting may not be enough to generate profits. "It's just a matter of whether consumers feel they have enough disposable income to spend," says Buy.com's Rusick. Believe it or not, however, industry participants swear that the technology pieces are in place for the long-promised digital revolution to finally arrive. Some products, such as digital cameras and notebook computers, are getting smaller and lighter. Others, like liquid-crystal displays on TVs, are getting larger. Fueled by falling prices, unit sales of digital products -- from camcorders to TVs, to MP3 music players -- are booming. WORKING TOGETHER. Broadband Internet access, now in 15 million U.S. homes, is contributing to this transformation. For many families, it has been a short jump from fast Net access to making the wireless, connected home a reality, thanks to the proliferation of shorter-range networking technologies known as Wi-Fi (which uses the 802.11 standard) and Bluetooth. Advances in consumer tech facilitated by high-speed home networks "is something I think people are underestimating right now, as they've seen some of the dot-com promises not come through," Microsoft (MSFT ) founder Bill Gates said in a speech at CES. The real key to the exciting new products on display at CES -- and soon, at a discount electronics chain near you -- is that all these digital products are starting to work together in ways that make them much more useful. It's now relatively painless to film a child's birthday party with your camcorder, edit it on your PC, and burn it onto a DVD to send to relatives. Technofiles can display their own digital photos on their digital TVs' vibrant liquid-crystal displays. Or they can send audio files from a PC over their home wireless network to the new "media hub" -- a combination digital hi-fi stereo receiver, media server, and wireless router (think of a souped-up set-top box) -- in their living rooms. The first wave of wireless home networks was installed mainly by families who wanted to share Internet access across multiple PCs, says Jane Tsao, executive vice-president and co-founder of networking company Linksys in Irvine, Calif. Now that families have the network, they understand its potential and want to do more, like hook up stereos, TVs, and phones. COMBINED CAPABILITIES. To help them along, consumer-electronics manufacturers are packaging products together in hopes that promises of "plug and play" will attract more buyers. Apple Computer (AAPL ) is probably leading this charge with its "iLife" suite of photo-, film-, and music-editing tools that integrate seamlessly with its laptops and iPods, Apple's MP3 player. Other leading computer companies are in hot pursuit. At CES, Hewlett-Packard (HPQ ) introduced a Digital Media Receiver, expected to sell for $299, that can wirelessly pull music and photos from a PC for playback on a stereo and TV. In fact, all kinds of digital products are showing up with combined capabilities. You can buy a cell phone that includes a digital camera or an embedded personal organizer -- and that's just the start of customization for handsets, says Tae Hea Nahm, a general partner at venture-capital firm Storm Ventures in Palo Alto, Calif. Microsoft's Xbox and Sony's PlayStation 2 video-game consoles can also play CDs and DVDs. Apple is even merging its iPod music player with a new ski parka that includes electronic controls on the sleeves. Falling component prices have also enabled the mass marketing of niche products that make technology that otherwise could have languished in research labs useful for consumers. IRobot in Somerville, Mass., introduced its Roomba automated vacuum cleaner last fall for $199. Prices have come down dramatically for new gadgets for cars, including satellite radios and global positioning systems. Microsoft hopes to revolutionize the wristwatch with its Smart Personal Object Technology (Spot), which can send Web-based information over a radio frequency to miniature devices. Next on the agenda for Spot: high-tech refrigerator magnets that display customized data pulled from the Web. DVD SPRINT. Price deflation, always a force in tech adoption rates, may be picking up speed. Buy.com's holiday orders for consumer electronics were up 66% over the prior year. "It's not so much new products as it is decreasing price points," says Rusick. DVD players, the fastest growing consumer-electronics product in history, is the best example. As prices fell last year to the $100 range and below, unit sales grew 39%, to 17.6 million, and penetration levels to 35% of U.S. homes. In 2003, unit sales of DVD players are expected to climb 14%. Prices have also fallen for handheld music players that use the MP3 format. Unit sales were up 56% in 2002 over 2001 and are expected to rise an additional 26% in 2003, to 2.1 million units. Prices of digital TV sets are also coming down, to the still-steep $3,000 range. And financing deals that frequently include no payments until 2004, are spurring sales. Some 2.7 million digital TVs were shipped in 2002, according to the CEA, and it forecasts sales of 3.8 million units (with revenues of $5.5 billion) in 2003. The association expects sales of ultrasharp plasma-screen sets to rise by 40% in 2003. OVERSEAS INVASION. With price pressure so strong, sales increases won't necessarily mean higher profits. Brutal competition plagues the industry at many levels. For instance, online shopping makes it all but impossible for bricks-and-mortar retailers to charge a premium. So Wall Street is decidedly downbeat on their prospects, especially after holiday sales at companies like Circuit City (CC ) and RadioShack (RSH ) turned out to be disappointing. Thanks to increasing competition, even leading manufacturers with strong brands (here, Sony is still king), can't count on much of a premium anymore. That may be partly because the quality of products made by low-cost producers is rising, says Sean Wargo, director of industry analysis at the CEA. Thus, a much higher percentage of consumer-electronics sales now go overseas, especially to manufacturers in China and India, where labor costs are rock-bottom. Today, 60% of electronics come from abroad, up from 40% only 10 years ago, says Wargo. For consumer-electronics manufacturers and retailers to prosper in an increasingly competitive environment, they'll have to provide better customer support. This means improved service as well as more consumer education. A lot of people now know how to take snapshots with digital cameras, but that doesn't mean they know how to e-mail pictures to friends, display them on a big screen, or back them up on their PCs. Customer-service reps at Linksys report that increasing numbers of callers wait to hear a live voice before they even tear the shrink-wrap off the box. Finding ways to both lessen the frustration of consumers who can't assemble their costly purchases and keep profits up will be a challenge for many companies, as more and more novices buy increasingly sophisticated gear. WHO'LL BENEFIT? Legal and regulatory battles over the digital distribution of copyrighted materials are also acting as a drag on the industry. "That issue needs to get resolved," says Storm Ventures' Nahm. "That's what's holding up widespread adoption and deployment of digital media." Assuming that a weak economy doesn't derail the consumer-led tech wave, Blaisdell of DCM believes that software and chip designers probably will have the easiest time profiting. Ultimately, however, he thinks cable-TV companies will benefit the most, since they control the entertainment pipe that goes into homes -- and for some media giants, the content as well. Ultimately, the current onslaught of innovation in consumer electronics may neither boost profits of the broader industry nor lead the economy out of the tech slump. But it's sure to mean lots of exciting new products for the home and good deals for consumers. For techies weary of their industry's three-year slump, that's at least a step in the right direction.  By Amey Stone in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | JANUARY |
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