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Can 3D TV put Philips back on the map?

Philips has been around for forever but never had the cachet of Sony or Samsung. Can CEO Rudy Provoost change that?

White is an appropriate corporate color for Philips Consumer Electronics, the gadget and home electronics unit of Royal Philips Electronics.

It matches the "sense and simplicity" brand and awareness campaign the company is organizing around its products. Second, it implies that the slate is now clean.

The Dutch conglomerate is one of the oldest in the world in electronics. It came out with the compact audio cassette in 1963 and was one of the companies behind the CD in 1983. In the U.S., it sold televisions through the once prevalent Magnavox brand. (The parent company was founded in 1891.)

But the company had trouble keeping up with Asian competitors in the 1990s and early 2000s. Now, after a massive reorganization and rethinking of it position in the world, Philips is rebuilding. Royal Philips Electronics reported net profit of 332 million euros ($401.2 million) for the fourth quarter, above the 224 million euros ($270.7 million) expected by analysts.

Rudy Provoost, CEO of the consumer electronics group, has played a major role in changing the course. He sat down with CNET's Michael Kanellos recently to talk about trimming the product lines at Philips, brushing up the brand, and the Blu-ray vs. HD DVD debate.

Q: How did you end up at Philips?
Provoost: I joined Philips in October 2000 and ran the European consumer electronics business until the middle of 2003. Then, Frans (Van Houten, CEO of Philips Semiconductor) and I became sort of twin brothers because he was in charge of the business creation side and I was part of the execution side (for Philips Consumer Electronics worldwide.)

What's different than in the past is that we are reaching out to other companies.

In the fourth quarter of last year, I became CEO of the Consumer Electronics division worldwide and Frans became CEO of Philips Semiconductor, so we are sort of partners in crime.

Before Philips I worked for Whirlpool for nine years, and before that I was with Canon for five years.

Although Philips has been in electronics for years, it hasn't seen the kind of success in recent years as some of its competitors. What was the situation like when you took over?
Provoost: It was a pretty challenging environment. If you look at the track record of consumer electronics at Philips, it has been a journey of ups and downs and all the time struggling to be profitable.

Two to three years ago, we were running on one cylinder--Europe--and now we are running on all four cylinders and all regions are contributing positively to the results. One of the big challenges was turning around North America.

CE is one-third of the business at Royal Philips Electronics. It is a $10 billion company and Royal Philips Electronics is $30 billion. We want to turn CE into a kind of a consistent profitable business and generate a lot of cash for the company.

What did you do to change it?
Provoost: We had to do a number of things differently. For one thing, we had to articulate the brand in a clear way and differentiate between the Philips brand and the Magnavox brand. In that sense, the sense and simplicity (branding) initiative helped a lot.

No. 2, we very much simplified our business models. We reduced the number of retail customers dramatically, by a factor of five. We were everywhere. We sold everywhere. We were a one-size-fits-all company, and that was generating more complexity and confusion than value. We had to get this process going in North America while keeping Europe going while capitalizing on opportunities in Latin America and, more importantly, Asia.

We reduced the number of SKUs (stock keeping units) by a factor of five.

That, to be honest, is what Philips is known for in the United States, an explosion of SKUs (product models) in a bunch of different categories.
Provoost: Well, I can tell you, it is a SKU implosion now. We had close to 600 (product) SKUs. Now it is below 150. It's innovation too. You need innovation that fits the American road map. You need heavy hitters like Ambilight. (Ambilight adjusts the light on the screen with ambient light to optimize viewing conditions.)

In reality, we are running a business right now that in 2002 and 2003 was two-thirds the size it is today. We were doing that with 1,000 people, and now we do it with 250. It is a pretty significant change. The growth in 2005 in the first nine months was 30 percent.

It's interesting that you're going after Asia. It seems like you'd run into a big feeling of "buy local" in a lot of countries.
Provoost: We partner with a lot of ODMs (original design manufacturers) and OEMs (original equipment manufacturers). If you want to win in Asia, you have to use your global scale and power. Our Ambilight TVs are sold in Asia. In most Asian markets, we are a prominent top three player and often the most prominent foreign brand.

You also have to customize for local markets. We had double-digit growth in Asia for the past three years. Over the next 24 months, we want to bring China to a billion (euro) level. We want to bring India--total Royal Philips Electronics--to a billion level. The nice thing is that the brand is very powerful in Latin America and Asia.

In North America we had to rebuild that equity, which we successfully did. Now it is no longer an awareness game; it is a preference game, and it is a sales conversion game with retailers. This has allowed us to refocus our marketing investments How does this manifest itself on the product design level?
Provoost: The sense and simplicity brand promise contains three major cornerstones: The product needs to be designed around the consumer; it has got to be a unique experience; and it has got to have an advantage, some innovation, and not tech for its own sake.

If you take a product like an Ambilight TV, the three things merge together. It is a great design. It is a great immersive experience, and you see the results on the screen. If you take our sales right now of all flat TVs above 42 inches, one of two is an Ambilight TV.

Do you license the technology?
Provoost: No, we use it for our own purposes.

What will be the big product categories for Philips?
Provoost: We have four elements. First, connected displays. That is $5 billion of the $10 billion. Then the second part is the entertainment solution. That includes surround sound home theater systems as well as MP3 players and home video. The third part is networking: voice over Internet Protocol and IPTV (Internet Protocol television). We are close to the Microsoft's. That's where we made some inroads with leading operators in Europe--like British telecom. In North America, we work with DirecTV.

At the end of the day, a consumer wants to enjoy HD content. You need a format for that.

And the last area is peripherals and accessories. The Nokias, the iPods of the world, all need accessories. It's high margin and high growth. One example is the acquisition of Gemini. Gemini was a leading cable company in the States, a $200 million company. We acquired the company three years ago.

What's different than in the past is that we are reaching out to other companies. That is different than the Philips of the past. We are working very closely with the studios in the Blu-ray discussions. Companies like Fox and Disney are our partners. We are reaching out to the operators. Over time, you could think about premium downloadable software or prepackaged media.

LCD (liquid-crystal display), SED (surface conduction electron emitter display) or plasma--where do you stand?
Provoost: We are very much believers in LCD. It will be the growth of the market. In the 42-, 47-inch area there will be space for plasma, but with our partnership with LG in LCD we believe we are well-positioned.

LCD will go up in size, and the whole flat TV market will of course will grow. We think LCD will double this year compared to last year in volume. But we do have a plasma offering. A lot of lamplight TVs are plasma.

We also have a pretty aggressive innovation road map. If you want to bring high definition to the next level, we think that might be three-dimensional television.

What's that?
Provoost: You watch TV and get a three-dimensional effect. I don't want to make too much of a promise, but somewhere in the next 24 months we want to bring that to market. The neat thing is that if you have high-definition content, like a Blu-ray disk, then you can enhance that viewing experience with 3D algorithms. So you can you use two-dimensional HD content for 3D viewing. That is the first phase. The second phase is making 3D content. This is the next-generation TV we are working on at the moment.

Why is the fight between the HD-DVD and Blu-ray camps so volatile? Is there more going on here than engineering pride?
Provoost: At the end of the day, a consumer wants to enjoy HD content. You need a format for that. The whole discussion is over which format will prevail. We believe that Blu-ray has a lot of advantages over HD. It has to do with copy protection, capacity, coating, costs, convenience, interactivity, menu management, navigation, affordability, and most importantly support.

It is like in the CD and DVD days. Increasingly, there is so much intellectual property in there, and everyone looks for a fair reward.

What we are very pleased with is the progress in the past few months. Some of the studios have been Blu-ray and always will be Blu-ray. Some of them are HD. But now some of them are saying they will support Blu-ray, too. So if you are a consumer and you know that three and four of the studios are betting on Blu-ray and the fourth is betting on both, then you know which format to choose. Blu-ray will always be there.

I was very pleased that Michael Dell announced that Dell will support the Blu-ray format. What we are trying to do now is get the studios to get their video assets turned into the Blu-ray format.

In the second half we will launch a Blu-ray player, and then in the first half of 2007 we will launch a triple writer than can handle CD, DVD and BD.

OK, but why is there such a fight going on? Is there a large potential for royalties?
Provoost: There are so many players involved, from content creators, to content aggregators, to broadcasters to manufacturers, and ISPs and the Microsofts and Intels of this world. It's tough to get all these parties to agree, and they all have intellectual property interests.

Clearly there is a lot of intellectual property that went into this, so companies like Philips and Toshiba and Sony all look for a return on the investment. That is what is making the debate a challenging debate.

It is like in the CD and DVD days. Increasingly, there is so much intellectual property in there, and everyone looks for a fair reward.

Do you think customers will get confused? In a lot of ways, this is worse than the old debate between Betamax and VHS. When people are buying movies, they can probably remember if they have a Blu-ray or HD at home, but it will also affect what kind of computer they can buy.
Provoost: From a consumer perspective, the best thing would be that there is one format, but I don't know if that will be the reality. You will have to follow the logos.

But this will limit people's choices.
At the end of the day as a consumer, you have to make choices. Look at our MP3 players. They have "plays for sure." If you make a conscious choice about that, and you have Windows XP Media Center, then you have a perfect combination.

With Blu-ray, yes, there are choices that will be made. I guess a year from now at the Consumer Electronics Show a lot of the questions that are still on the table will have to be answered. Today there is polarization. Over the next year some of that polarization will narrow down, I think.

This year we all put our stakes in the ground and said, "Go." Well, let's go and learn and adjust.

Some people claim that Blu-ray players will cost more because of manufacturing issues and other factors. Is that the case?
Andy Siegel of Fox is very passionate about this. There are many ways to look to costs and express costs. In their view, the cost equation over the longevity of the format is absolutely the best with Blu-ray.

There are calculations you can make. We are convinced that over a consumer lifetime perspective, it is the best proposition.