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issue: March 2004 APPLIANCE Magazine

Digital Strategy or Tragedy?

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Editorial from Lisa Bonnema, Editor, APPLIANCE Magazine

As if the consumer electronics market wasn’t crowded enough, PC makers are squeezing their way in, trying to claim a spot in this fast-moving—and fast-growing—appliance segment. Why all the shoving you ask? In a word: convergence.

Lisa Bonnema, Editor, APPLIANCE Magazine

That's right; it's happening. While we've all been using this industry buzzword for years, major moves by leading computer technology companies are hinting that convergence has reached a new level.

Pick one - Dell, HP, Gateway, Apple, Microsoft, Intel, and Epson; they all want a piece of the consumer electronics (CE) pie. Leaders of the pack include Gateway, which entered the digital TV segment in 2002, and Dell, which introduced its LCD TVs and music players last fall. The rest have been jumping on the digital bandwagon since, with most companies using the recent International Consumer Electronics Show (CES) to profess their new, expanded focuses.

HP announced its digital entertainment strategy at the annual show, previewing an entire digital line, which includes an entertainment hub, 30- and 42-in LCD plasma digital displays, a digital music player, and an updated iPAQ organizer with remote control capabilities. Microsoft announced software initiatives that will more easily connect the PC and TV, and chip maker Intel said it plans to offer new chips for high-definition TVs. Even printer maker Epson introduced projection TVs at CES.

So why would a bunch of successful technology companies want to enter an industry already marred with the ever-dropping price tag? Many see it as proactive. Instead of sitting around as their traditional businesses mature, these companies are expanding out to a trendy territory that's based on what they already know - digital electronics.

According to research firm ABI, the digital convergence of consumer electronics and PC products is a "natural, logical confluence of the technologies." The firm believes that computing power, residential broadband access, and home networking are the three catalysts driving the convergence. Most industry players agree.

"The merging is inevitable," Jeff Greenberg, marketing manager for LCD TV maker Westinghouse Digital Electronics, told APPLIANCE during an interview at CES. "Content is converging. Is it a digital camera, a TV, or a PC device? It all comes together. Who will win? We don't know, but everything is changing."

A recent study from online research firm InsightExpress says that U.S. consumers are open to computer companies offering CE products. The survey results showed that while 54 percent of respondents favored traditional makers of plasma TVs, a significant 17 percent favored computer companies and 29 percent were undecided. For home entertainment systems, 21 percent favored computer companies and 58 percent favored traditional manufacturers, leaving 21 percent undecided. The results got better for PC companies as the devices got smaller, with computer companies and traditional manufacturers going neck and neck in areas such as MP3 players and digital cameras.

The reasons for choosing computer companies over traditional players included computer capability (47 percent), overall convenience (31 percent), the fact that computer makers make great products (31 percent), and the perception that the products would have the most advanced features and capabilities (26 percent). Based on the results, InsightExpress said that CE products offered by computer companies "represent truly viable alternatives in the eyes of the consumer."

Analysts like Eric Marks, however, aren't convinced. In fact, according to his research, PC manufacturers like Dell will not only regret their TV initiatives, but will "experience the darker side of reality TV."

The major obstacle, he believes, will be computer makers' web-based direct-sales model. Purchasing a TV online is much different than purchasing a PC, he says, arguing that consumers want to physically see the differences in image quality and also want instant gratification after they make their purchase. He also says that online shipping will cause TV consumers cost and quality headaches they aren't used to experiencing. "Currently, retailers get their TVs shipped in bulk, reducing the unit shipping cost dramatically," Mr. Marks says. "Individual online purchases result in a much pricier shipping fee due to the lack of volume." Add that to the increased fragility of advanced TV products, and Mr. Marks believes that shipping tragedies are just waiting to happen.

He also says that the cost savings associated with buying online are a myth. "When promotions such as mail-in and instant in-store rebates are factored in, there is no evident price advantage to shopping at Dell.com," Mr. Marks claims.

In addition, as TV competition heats up, profit margins will inevitably drop, leaving high-end brands to offset margin pressures. Mr. Marks believes that because consumers are less likely to buy pricey items on the Internet, an online sales channel will force computer makers into the low-end of the spectrum, defeating the very reason they entered the segment in the first place.

The answer, he says, is for computer companies like Dell to abandon their direct-sales models and move into the traditional retail format, at least for their CE products. "Is Dell ready for such a leap? I'm not convinced," Mr. Marks says.

ABI agrees that there are certainly challenges ahead for these new entrants, but believes "the benefits certainly outweigh the challenges for non-CE players to enter the CE industry." The firm also believes that retail distribution may make or break product success.

Who will win? I wish I had the answer to that billion-dollar question, but I do think there is a larger lesson here - preparation. While computer makers have challenges to overcome as they enter a new market, the real question is have CE companies strategically planned for these new competitors? And if home networking reaches the levels everyone hopes it does, what will this mean for the white goods industry as the lines between "white" and "brown" continue to blur? Will white goods OEMs be facing similar competition in the years to come? Perhaps a company like LG Electronics, which plays on both sides of the field, has the right idea. Or maybe consumers will stay loyal to their tried and true appliance makers.

As digital convergence continues to affect all areas of the appliance industry, my hope is that our industry isn't ignoring what seems to be the inevitable. Are you prepared?




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