HolidayBuyer's Guide

How to succeed in the gadget biz

Buyers shell out more every year, but few companies have figured out how to turn a decent profit.

Consumers spend more on gadgets every year, yet few electronics companies have figured out how to turn a decent profit.

Now two authors and a growing list of academics and analysts say the consumer electronics business needn't be so brutal for product makers.

George Bailey and Hagen Wenzek recently wrote the book "Irresistible! Markets, Models and Meta-Value in Consumer Electronics" to explain how consumer electronics companies can improve with breakthrough technology, strategic partnerships and-? though it may sound obvious--paying attention to customers.

"There are not a lot of companies who do a really good job of thinking through the customer perspective."
--Barbara Bund, author

"We're not condemned in this industry to make 3 percent (profit margin). That's a self-imposed problem," Bailey, general manager of IBM's global electronics industry, said in an interview with CNET News.com.

Of course, it's easy to say, "Do what Apple does." But the numbers tell the story: Sony Electronics had $11.1 billion in sales in its most recent quarter, and an operating income of $412 million. Because Sony Electronics is a unit of Sony Corp., the final profit numbers for the individual business are unavailable. Apple, on the other hand, had a $472 million profit on $4.37 billion in sales in its most recent quarter.

So what does Apple do right that Sony does not? Two things: It innovates, and it gives customers what they want, from the packaging to the slick advertising, say the authors.

"That's sort of the secret formula for success that the book talks about," said Bailey.

Other companies are also managing to squeeze out comfortable profits by going high-end. Luxury audio/video maker Bang & Olufsen continues to woo its affluent customers with wine-tastings and exclusive golf tournaments even after the sale has been completed.

But consumer electronics companies don't need to be Apple or Bang & Olufsen as much as borrow their approach to sales. Apple products provide that proverbial "Apple experience." From stepping into an Apple Store to the ceremonial un-boxing of the iPod or the Macintosh, the company manages to deliver that intangible "wow" factor that seems to have befuddled competitors with much larger market share.

And like Apple, designing cutting-edge technology is one of the few ways device manufacturers can get away with raising prices. It sounds obvious, but few companies have the time or money to do it.

"In our industry the prices fall very quickly, unlike appliances where manufacturers can sell the same product the next year," said Sean Wargo, director of industry analysis for the Consumer Electronics Association. "We've succumbed to a constant source of deflation."

High costs of innovation
Innovation helps you stay that deflation, Wargo said. Take portable CD players. Ten years ago, you could buy a decent one for $50. Now, instead, people are buying $300 MP3 players. "The benefit of new technology is allowing the industry to grow revenues at a substantial rate. (Consumers are) willing to pay more for a new product, (but you must) convince them to buy the new product at a premium over the old product," he said.

Even traditional PC maker Hewlett-Packard is starting to move into the television market because of the potential it sees for home networking and the emergence of the PC as a media hub. On Aug. 10, HP released its new 37-inch MediaSmart high-definition LCD TV, which enables wireless networking with any home computer.

It's a logical transition, said Jan-Luc Blakborn, HP's director of digital entertainment.

"When we entered TV (three years ago), we said, 'We've got to innovate in this space if we want to make a difference and make some money.' A commodity play is not the best way to do that," Blakborn said.

Most companies don't go that route because the cost of innovation can be high, with no guarantee of success, said Haim Mendelson, professor of electronic business and commerce at Stanford University's Graduate School of Business.

Bailey and Wenzek also emphasize partnerships as a way to get the right mix.

"Companies no longer have a little lab where they invent things themselves and come out into the market and the world and expect it to be a big success. In fact, a lot of the big breakthroughs you see are coming out of companies collaborating together," Bailey said.

The Sony Ericsson partnership, he said, is a good example of a hardware and content-provider union that has reaped benefits for both: inventive design and increased sales figures.

So far this year, Sony Ericsson has released three Walkman-branded music phones, and a Cybershot-branded 3.2-megapixel camera phone. The results are in, and they're pretty good: The partnership reported second-quarter sales of $2.89 billion, a 41 percent increase over the same quarter of last year.

"It's a good example of collaboration. Probably neither Sony or Ericsson could have done (alone) what they did together," Bailey said.

Others are following with similar partnerships. In June, Nokia and Siemens announced a new partnership created to compete with the success of Sony Ericsson.

Getting to know your customer base is "crucial," according to Mendelson. Service providers know their customers because they are in regular contact with them, while device manufacturers tend to stay focused on the physical product and improving the technology.

Barbara Bund, author of "The Outside-In Corporation," preaches the importance of customer-focused business models. "There are not a lot of companies who do a really good job of thinking through the customer perspective. It's very strange. It sounds so simple, but it's hard to do," Bund said.

The personal touch
Bang & Olufsen embraces this customer-as-king premise. Zean Nielsen, the Danish company's North American marketing director, explains it this way: "We don't see ourselves as a consumer electronics brand," but rather "a lifestyle company that happens to sell audio/video."

Sounds schmaltzy, but there's something to it. Nielsen said the company's customer relationship management software system lets him know, in real time, how many people have entered a store, who sees their advertising, and how much they're willing to spend on a home theater system, which is usually around $100,000.

"It's difficult to find those types of people. Once you have them, you want to hold on to them for a long time," he said. "We have every single customer record we could get our hands on."

If need be, said Nielsen, a salesperson will teach the customer's entire household how to operate the new home theater system. And after five days, the CRM system prompts the salesperson to handwrite a thank you card. Then, 21 days later, it reminds the store's manager to send a thank you card with a gift.

"We don't have the same budget as the Sonys and Samsungs of the world...We have to be very, very targeted as far as who we advertise towards," Nielsen said.

Of course, not every company can duplicate the inventiveness of Apple or throw wine parties for customers. Smart companies will try, at least in their own way. But it remains to be seen which will succeed.

"Is it going to be a current industry incumbent?" asked Bailey. "Or is it going to be a new entrant, somebody who comes in laterally from a different direction, focused on the consumer and just pulls everybody who makes devices along with them? That's the real question."

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