August 21, 2006 4:00 AM PDT

How to succeed in the gadget biz

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.

CONTINUED: When partnerships pay…
Page 1 | 2

See more CNET content tagged:
deflation, consumer electronics, electronics company, profit, Apple Computer

18 comments

Join the conversation!
Add your comment
Funniest line in the article:
"...and it gives customers what they want, from the packaging to
the slick advertising,..."
<sarcasm>Sure, I buy Apple products because of the packaging
and the advertising! </sarcasm>

Give me a break. It's quality that matters. If you buy a Macintosh
or an iPod, you can expect it to work well out of the box, with
little or no effort on your part. Apple really doesn't have any true
competition on a quality level. A Windows PC? You better have IT
standing by, and be sure to install anti virus software BEFORE
connecting to the internet. Some other MP3 player? Good luck
figuring out how and where you'll download songs.

What most electronics companies don't get is that ease of use is
far more than just point and click. It's point and click with as few
clicks as possible getting you the results you're after. It's little
details throughout the system that just work, and in a way that
make you think it's only natural. Here's just one example: In
Apple's email program, the inbox shows when messages arrived
and the format depends on the width you set. If you provide
enough room, a message recieved will read something like this:
August 19, 2006 8:38 PM
Narrow the column and instead of truncating, it progressively
changes the format:
Aug 19, 2006 8:38 PM
8/19/06 8:38 PM
Aug 19, 2006
8/19/06

This is just one tiny little example of the attention to detail that
is found throughout Apple products and which most other
electronics companies just don't provide. That detail IS the wow
factor!

If you want to convince people to buy a new product at a
premium over an old product, you've got to have a new product
that's better than the old one, and you can only do that by
paying attention to details. No amount of marketing will help
until you've got that right. Just look at Sony. They spend tons on
marketing. While it gets them sales, it reduces their profit
margin.
Posted by Macsaresafer (802 comments )
Reply Link Flag
lighten up
It's just an article
Posted by mammalthedog (10 comments )
Link Flag
Compared To Sony?
Just about any company looks good, when compared to the very stagnant Sony.

Apple's sole market share success is the iPod, and that will be facing increasing competition in 2007.

As for personal computers, my HP has Just Worked perfectly since I bought it in 2002 - never a hardware problem, never a successful virus/worm attack, never a need to reinstall Windows - 100% hassle free.
Posted by john55440 (1020 comments )
Reply Link Flag
Another Windows apologist!
So you've never had your Windows system compromised!
Congratulations  but how do you know? Most spam comes from
zombie PCs, and there's an awful lot of spam out there. What
makes you think yours isn't one of the spam bots?
Posted by Macsaresafer (802 comments )
Link Flag
Info on packing also helps in comparison
You can see a DVD player from Toshiba, Sony, Philips on the same shelf with same price. How do you choose one finally? The Packing needs to give enough information about the product and its PLUSes against competition. I see that even the packing is so dull in some of these products. Ultimately people are brandconscious or take advice from some one who already has the product.

Bottom line, more precise information on packing, the better.
Posted by bhawar (3 comments )
Reply Link Flag
Technology should be indistiguishable from Magic
I don't know who said it first but it's the idea that's stuck in the back of my head when developing for users. Let me repeat that:

Technology should be indistinguishable from Magic

You plug the iPod in, buy your music through a seporate and easy to use program and tada.. it just works when you hit play. Regular users don't care how it works, they just want to hit Play and hear sounds. Resize columns in osX and the column format adjusts for best fit; magic.

Apple isn't the only company to figure this out but they do a heck of a job at it.
Posted by jabbotts (492 comments )
Reply Link Flag
Sony vs Apple
Irregardless of what many say, Apple simply don't innovate most of the time. What they do is borrow and improve, much the same as Microsoft.

They borrowed the GUI and the mouse. Compaq were first to develop HD music players, all Apple did was "improve" it. (Personally I don't like the iPod interface.) I am not sure what part of the original iPod that they did make or design, but it is not the dial, the HD, the main chip or even iTunes. These days all that makes Apple different from Dell is that they have their "own" software, but most of that is either bought or borrowed. Even the dock is a rip off of the RISC OS interface. The most original innovative thing that Apple has done for years was the Newton.

While it is not directly Apple anyway, Pixar is often added to Apples innovation list. But Pixar is largely made up of an arm of ILM that George Lucas (stupidly) sold off.

Sony on the other hand not only design, but they also make most of their products. Sony was the first to sell a portable tape player, and the first to sell a compressed audio player. Apple were just lucky that Toshiba had just released the 1.8 inch drives. Sony had the hard job of being forced to not only make their own compressed audio format (ATRAC), but also a storage method.

In addition, Apple have turned to Sony at least twice for help with the 3 1/2 inch drives and when they redesigned the Macintosh Portable into the less clunky PowerBook.

Innovation is not the number one way to succeed anyway. If that was the case then the Amiga and the early MP3 players would have been more successful. The key to success is making your target market think that they need your produce, whether they do or not. Apple excels at this.
Posted by Andrew J Glina (1673 comments )
Reply Link Flag
1) make a product people want
2) sell it for a reasonable price
3) make lots of money

In Sony's case they haven't come up with a creative product line since the walkman (remember the popularity of the yellow waterproof walkman when nobody even needed one?). Everything since they've been coasting on their brand image and now it's been eroded to has-been status.

case in point -the new Samsung LED tvs -i was floored by the quality using a blu-ray player hooked up to one of these. I thought 'this must be the product that's bringing sony back!' then I saw the brand name. sony's got a 10" OLED I can't buy, Samsung's got a 55" LED TV now on sale at Fry's. Guess which one I'm saving up my money for.
Posted by megustansalchichas (153 comments )
Reply Link Flag
 

Join the conversation

Add your comment

The posting of advertisements, profanity, or personal attacks is prohibited. Click here to review our Terms of Use.

What's Hot

Discussions

Shared

RSS Feeds

Add headlines from CNET News to your homepage or feedreader.