September 22, 2004 11:39 AM PDT

PC makers eye consumer electronics all over again

For Gateway, the picture could not have been clearer when it came time to shutter the company's digital camera line.

Although digital camera shipments have exploded, increasing by 71 percent in 2003, the PC maker was unable to gain more than a small percentage of the market. That disappointment happened even though Gateway-brand cameras were a major part of the company's 2003 drive to reach profits by becoming a consumer electronics brand.

News.context

What's new:
Dell, Gateway and HP are making another run at consumer electronics for the 2004 holiday season.

Bottom line:
To date, the record has been lackluster for PC makers trying to carve out a consumer electronics niche. But the companies see favorable signs and are ready to try again.

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"Take digital cameras and DVD recorders...when we brought those into the (third-party retail) channel there wasn't a lot of differentiation," said Ed Fisher, senior vice president of product planning for Gateway. "The (Gateway-brand) digital camera line, for example, was really no different than the other 30 suppliers that third-party retailers had."

Gateway read the writing on the wall. Coming after its eMachines acquisition earlier this year, the company Internet appliance craze in the year 2000. They've faced a daunting obstacle course, with barriers ranging from the lack of brand recognition to the relatively high selling prices of certain products--even now, most large, flat-screen TVs sell for $1,500 or more--to slowly developing technology standards. This year, as in recent years, uncertainty about the economy and its effects on the 2004 holiday season in the United States could slow their progress again.

But PC makers have long eyed the electronics fields dominated by Asian giants such as Sony, and they'll forge ahead again this year. HP and Gateway plan to release new branded products for the holidays, while Dell is set to add to a Dell-brand consumer electronics product line it launched in 2003.

No, really--this is the year
This time around, success may be more likely because of better integration of products and more receptive consumers. Still, most observers agree that it will still take some time for PC makers to establish a foothold and that not all products will succeed.

HP stayed out of the fray in 2003. Now, however, it sees favorable signs, such as increases in the use of digital cameras and digital music--as many as 50 percent of U.S. households now have digital cameras, and about half of HP's consumer PC owners use their PCs to play music, the company says.

HP believes digital entertainment products, including cameras, music players and TVs, will become an increasingly important part of its consumer product business over the next two to five years, said John Solomon, vice president of HP's U.S. Consumer Businesses, Imaging and Printing Group.

For that reason, the company has unveiled the broadest lineup to date of HP-brand consumer electronics products. Among them are an HP-branded version of Apple Computer's iPod music player, HP-brand plasma-screen and LCD-screen televisions and a number of new digital cameras and printers. The company also unveiled a new Media Center PC called the Digital Entertainment Center. The machine is designed to look like a stereo component and to operate via remote control, while performing jobs such as recording TV programs. HP will also offer a Media Center Extender, a device that can zap files from a Media Center PC to TVs and other devices using wired or wireless connections.

Solomon acknowledges that some products--such as the HP Instant Cinema, a compact projector for showing DVD movies--will have limited audiences and that the company will have its work cut out for it to convince consumers to buy HP. But he said the new products were carefully chosen.

"We're not just throwing a bunch of products against the wall. We're making a deliberate and specific entry into the digital entertainment market, where we believe we can make a contribution," he said.

Dell, which introduced Dell-brand televisions, printers and music players in 2003, plans to refresh many of those products in time for the holiday season. The company will deliver its first plasma-screen television this fall and is likely to offer new Media Center PCs, along with a Media Center Extender. But it will measure success differently.

"We will introduce new offerings only to the extent which they can contribute to the (overall company) goal to grow profitably," John Hamlin, senior vice president of Dell's consumer business, said recently on a conference call for analysts.

For its part, Gateway hasn't ruled out reintroducing Gateway-brand cameras or similar products, Fisher said. But "what we want to do is...to create products that are either PC-enabled or act like a PC," he said. "We'll continue to sell PCs. We're looking at the MP3 category as well...and then we're looking at a plethora of other devices that we think fall in to the PC-enabled category. That could include media adapters that allow (consumers) to share or view content from a PC."

There's one thing the three companies agree on--that PC makers can build products that work well together and, where possible, can use established industry standards. But incumbents such as Sony say PC makers still lack a deep understanding of consumers and thus will miss opportunities.

PC makers may also face a few problems of their own creation. Despite their ability to create products that can work together, they've yet to put together a convincing pitch for why their gear is better than that of better-known consumer electronics brands such as Sony. Sticker shock could also hurt PC makers, as they have yet to achieve breakthrough pricing on products such as televisions that could sway consumers in large numbers, analysts say. Dell, HP and Gateway all offer large LCD televisions, for example, and even though their prices are reasonable, ranging between $1,999 and $2,999 for a 30-inch model, they still cost a considerable amount of money.

"Let's not kid ourselves," said Steve Baker, an analyst at the NPD Group. Right now, "there are just not a lot of people out there who can drop $2,500 on a television."

But time may be the most important ally for PC makers looking to make their way into consumer electronics.

"The markets are morphing in the favor of the PC guys," Baker said. "We're likely to see a lot of price compression in the flat-TV market in the next couple of years. PC guys have experience with those kinds of marketplaces. The electronics guys don't."

Industry groups, such as the Digital Living Network Alliance and the Advanced Access Content System Licensing Authority, are also attempting to come to the rescue of PC makers. They're working to remove legal and technological barriers that prevent more widespread sharing of copyrighted content, such as music and video.

The fruits of those labors are likely years away, if they yield anything at all. But that hasn't stopped companies such as HP from contributing, Solomon said, as the difficulty of obtaining certain types of content could limit the growth of digital entertainment devices over time.

Indeed, thanks to the few success stories--namely Apple Computer's iPod music player and its iTunes music service--HP believes consumers are not only ready to adopt new ways of accessing content but they're also willing to pay a reasonable price for it, he said.

"This is an entry point, and over time we see this growing from a volume perspective...to become a very large part of our business," Solomon said.

 

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