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Philips comes full circle with massive bet on lighting and health-tech

The 123-year-old Dutch company has ruthlessly cut ties with TV, audio, and the categories that have made it most famous. Can an ageing population put this venerable firm back on top?

Incandescent bulbs on display in the Philips Museum, Eindhoven. Luke Westaway/CNET

"You need to dismount when your horse is dead," Philips CEO Frans Van Houten explains during a company Q&A , fielding a query on why the company has unceremoniously ditched the product categories it's arguably best known for. "What was relevant 20 years ago is no longer relevant today. Therefore you need to reinvent yourself."

Appointed CEO in 2011, one of Van Houten's first moves was to spin off the company's TV business. Last year it sold the rights to its audio and video gadgetry to Japanese firm Funai Electric. Its latest move sees the company split into two separate entities -- one handling lighting, and the other tackling both professional and consumer health tech.

The weight of history: Philips CEO Frans Van Houten stands with images of early company pioneers Gerard and Anton Philips. Luke Westaway/CNET

It's light, Jim, but not as we know it

Lighting is an industry that stands on uncertain ground. Philips' Hue lighting system, which connects colour-changing LED bulbs to your home Wi-Fi for minutely customisable lighting, is perhaps the company's highest-profile product, but the market for more traditional lights is collapsing faster than planned. In July long-time bulb-maker Osram announced 8,000 job cuts as a result of this decline.

Incandescent bulbs are, increasingly, not big business. Luke Westaway/CNET

Philips' stake in the lighting world is a big one. "Last year, this division had revenues of 7 billion euros, so it will be a sizeable company by itself," Freek Vermeulen, associate professor of strategy and entrepreneurship at the London Business School tells CNET. But despite its sizeable presence, and a head-start in the LED bulb business, the company's recent move to spin off its lighting division has prompted questions about whether the company is angling for a sale.

"Absolutely not," Richard Wergan, Philips' executive vice president, global head of brand, communications & digital says. "We're absolutely committed to the lighting business."

Health is wealth

With healthcare however, Philips is on steadier, and familiar ground. The newly-formed "Healthtech" part of the organisation is a unity of the firm's previous "Consumer Lifestyle" division (think electric toothbrushes, shavers and the healthy-eating-focused Philips Airfryer), and the professional "Healthcare" division (now think MRI machines and systems for managing hospital patient data). "Last year, these activities, in combination, had 15 billion euros in revenues," Vermeulen says.

"Philips has a large installed base in the medical devices market," Charlotte Davies, healthcare life sciences analyst at Ovum told CNET, noting that the company's current presence is primarily in acute care, i.e, emergency, short-term medical treatment, administered by medical professionals.

Philips is also betting big on health technology at home, however. Longer life expectancy means we're going to be spending many more years grappling with chronic ailments, which means more pressure on hospitals, which in turn means more emphasis on self-administered treatment in the comfort of your own house.

Philips' wearable BlueControl aims to sooth psoriasis pain at home, using blue LEDs. Luke Westaway/CNET

That's where Philips steps in, with a range of products aimed at managing conditions without a hospital visit. When I ask healthcare expert Davies whether treatment at home was going to be an increasingly important part of the health tech industry, her response is emphatic: "Yes, definitely!"

Philips posted a net income of nearly 1.2 billion euros in 2013, a hearty upswing compared to a 30 million euro loss in 2012, and a 1.29 billion euro loss in 2010. There are still reasons to be cautious, with Philips earlier this year describing slow sales of medical imaging hardware, such as CT scanners. Van Houten is determined that the approach is the smart one, however.

"We can only compete in the world against competitors from Asia, the United States or wherever if we look at unmet needs," Van Houten says, having spelled out his vision for a company exclusively focused on just two markets. It's a fresh approach for Philips, but the lighting and health industries themselves are very old acquaintances.

Back to its roots

Van Houten is speaking at the company's Innovation Experience event in Eindhoven, the city where Philips was founded in 1891. In the 123 intervening years, the company has woven itself into the fabric of the town. A statue of company pioneer Anton Philips welcomes visitors at the train station. Decades ago Philips was building housing, a bakery, a school in 1929 to teach people the company trade -- there's a Philips stadium where the town's football team, PSV (English translation: Philips Sports Club) plays. "This is Philips. And this is Philips. Philips Philips Philips," a coach driver motoring through Eindhoven tells passengers over the intercom, indicating broadly at enormous tracts of real estate.

In the centre of the town is the Philips Museum, one of Eindhoven's biggest attractions, located on the site of the company's first factory. A ticket lets you gawp at the vintage radios and gadgets that made the company a household name, but the corporate history lesson also throws the firm's latest bid for lighting and health-tech supremacy into sharp relief.

A 1933 Philips sodium bulb. Luke Westaway/CNET

Philips, which today employs around 120,000 people, got its start in the then-emerging electric lighting industry. Its first big business win came in 1898, a request for 50,000 light bulbs for the Russian Tsar's palace. As business grew, so came different types of bulb, including sodium lamps for street lighting. In the twenties and thirties, Philips formed part of the Phoebus cartel, a group of international light bulb manufacturers that worked to limit the lifespan of bulbs in order to keep sales up (a bit of company history that, unsurprisingly, isn't featured on the museum tour).

The Philips EF50 radio tube was vital to the war effort.

The cartel came to an end with the start of the Second World War, by which point Philips had wildly diversified. Expertise in crafting bulbs was a transferable skill that allowed the production of, for instance, X-ray equipment (an early inroad to health tech), TV tubes and radio valves. The company's EF50 radio tube, which was a crucial component in radar receivers built by British tech firm Pye, would become vital to the allied war effort. In 1940 Philips had components and equipment for manufacturing the vital tube sent in trucks from Eindhoven towards England, hours before invading German forces crossed the border into Holland.

Philips would go on to buy Pye in 1976. Colin Douglas, an engineer at Pye in the seventies and eighties told CNET, "During the time it was owned by Philips, the company was very good to their employees, with above-inflation pay rises, good welfare, pensions, etc, and good training.

"You always felt you were part of a company that cared about their people," Douglas notes. "I am still receiving a Philips pension, which seems to keep up with inflation."

Indeed, the latter half of the century saw Philips hitting a new stride, with radio expertise giving it a head start in a booming audio market. In 1963 it debuted the Compact Cassette, the cassette tape we've been using for decades to dance to Cyndi Lauper and record pop hits off the radio. Later it co-created the Compact Disc with Sony, and launched Video 2000, a format built to compete with VHS and Betamax, ultimately troubling neither.

1987 saw Philips' US business -- which since 1959 had been operating as a completely independent entity, managing businesses such as furniture companies and makers of garage door-openers -- finally come back to the fold. In the nineties, following the reunion, Philips TVs appeared on US shelves for the first time.

Video 2000 didn't give Betamax or VHS any sleepless nights. Luke Westaway/CNET

All of this meant that as the millennium approached, Philips was, in the public mind at least, very much an audio-visual company. Over the last decade and a half however, the firm struggled to compete with cheaper tech from rivals, even as the streaming, mobile, online world saw a demand for hi-fi gadgetry shrink.

From 2007 to 2011 Philips racked up almost 1 billion Euros in losses. Thousands of jobs were axed as consumer technology became a millstone around Philips neck -- one that the company has only just managed to shift.

The long way back to consumer tech

To those who remember seeing the Philips logo stamped onto CD players, hi-fi equipment or TVs in almost every home, the firm's retreat into lighting and health-tech feels like a defeat -- an admission that Philips isn't tough enough to play with Samsung, Apple, and the other big boys of the consumer tech playground. But while lighting and health-tech sounds like a major departure, a head start here could be Philips' ticket back to the big time.

Philips appears keen to shift its image as a me-too maker of consumer hardware. At the company's recent showcase in Eindhoven's UFO-shaped Evoluon (erected by Philips, naturally), sustainable lighting, advanced cancer treatments and tablet-compatible portable ultrasound devices are all being demonstrated. Philips is eager to dub these new avenues of tech as "meaningful innovation", entirely set apart from its humdrum AV past.

"We brought light to the masses," Wergan says. "These are innovations that really mattered to people. It wasn't the latest gadget."

Two obstacles

Philips isn't putting its weight behind such worthy pursuits just to make the world better, of course. It's hoping that by seizing a hold of two markets that show immense promise, it can keep investors feeling as warm and rosy as an LED bulb. It sounds like a winning strategy, especially when you consider the lessons to be learned from giants like Sony -- a company that's been slower to cut ties with its more aged categories, and expects to lose 2.1 billion dollars this fiscal year -- but Philips has a few hurdles to jump on its race back to the top.

The first is that its break from the "consumer lifestyle" era hasn't been a clean one. Philips sold its AV unit to Japanese company Funai Electric in early 2013, but that deal went sour, leading Philips to run the business unit as a subsidiary dubbed Woox Innovations, which in turn was sold to Gibson Brands earlier this year.

Philips Fidelio Soundbar HTL9100
Shoppers can still see Philips AV products on sale. John Falcone/CNET

Thanks to brand licensing deals however, all those products retain the Philips name. Philips TVs, headphones, soundbars, speakers, home video, in-car tech and accessories are still on sale around the world, despite no longer being anything to do with Philips itself. The brand's radical restructuring is happening beneath the public's radar, and no matter what it cooks up in the next few years, to the man on the street Philips is unlikely to become a name associated with cutting-edge health technology. In most minds, it will continue to be an AV company.

Secondly, and more seriously, Philips faces a threat from those other companies that understand that home and health are the next big battlegrounds for tech. Google spent 3.2 billion dollars acquiring smart-home technology Nest, while Apple has launched HomeKit and HealthKit with the latest version of its mobile operating software, two platforms designed to join up the burgeoning amount of Internet-enabled home and health related gadgets out there.

Apple wants to be the gatekeeper to your connected home. CNET

Philips is a confirmed partner company for Apple's new tech, but the alliance must be an uneasy one. If Apple's plan works it could become an omnipotent gatekeeper to the appliances and health-data-collecting products in your house -- something Philips would surely rather have the chance to achieve itself. Philips will have to be wary of supplying nothing but the hardware, too. Firms with enormous scale like Samsung are experts at finding ways of building existing successful products at a lower cost, with a lower final price tag. That's how Philips ended up chased out of the AV business, after all.

Philips believes its years of experience, particularly in professional health care, make its plan a viable one. "We haven't moved into healthcare, we've been in healthcare for over 100 years," Wergan says.

Professional healthcare is almost half of Philips' entire business. Luke Westaway/CNET

That's true. Philips was manufacturing X-ray equipment in the US and Europe in the thirties, and bought eight medical tech companies between 2005 and 2008 alone. Philips Healthcare makes a vast array of medical equipment, from MRI scanners to fetal and maternal heart monitors. In 2012 the division made 10 billion Euros, 41 percent of Philips' overall sales. That's a breadth of expertise Apple can't hope to touch, and one that generates what is fast becoming one of the world's most valuable commodities -- data.

"We have the clinical expertise of managing huge amounts of customer care information and patient data in the clinical and professional side of healthcare," Wergan says. "We have anonymous data, which allows you to build out different recovery models, different patient care models, real information which can be used to personalise medical care."

Consumer tech yawns open

Philips' latest moves are yet more evidence that our approach to technology is changing. The company may have ditched its consumer tech division, but seems likely to find its way back to our homes, cars and pockets, as our definition of what the consumer category means becomes much broader.

Who would've thought a thermostat would be leading a tech revolution? Andrew Hoyle/CNET

Once a term used to refer to isolated devices like mobile phones, laptops or hi-fi kit, everyday gadgets that shoppers lust over now include thermostats, lightbulbs and door locks.

The power to squeeze an Internet connection into every object within our walls has blown the consumer tech world wide open, and over the next few years we'll see companies and products that may have previously seemed dull offered a shot at gadget greatness. For Philips, clawing back its household-name status will be a slow, laborious affair. But, unsurprisingly for a company with over a century of history behind it, Philips seems prepared to play the long game.