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Consumer electronics gets ready for change How convergence will drive new business models A report from the Economist Intelligence Unit sponsored by Qualcomm Consumer electronics gets ready for change How convergence will drive new business models Preface Consumer electronics gets ready for change: How convergence will drive new business models is an Economist Intelligence Unit white paper, sponsored by Qualcomm. The Economist Intelligence Unit bears sole responsibility for this report. The Economist Intelligence Unit’s editorial team wrote the report, and the findings and views expressed do not necessarily reflect the views of the sponsor. Geoffrey Nairn and Pamela Whitby co-authored the report. Clint Witchalls was the editor. Mike Kenny was responsible for layout and design. Our thanks are due to all interviewees for their time and insights. January 2008 © The Economist Intelligence Unit 2008 1 Consumer electronics gets ready for change How convergence will drive new business models Executive summary wo of the top-five items on the wish list for US This report was commissioned by Qualcomm. The consumers for Christmas in 2007 were electronic key findings, emerging from extensive interviews with Tdevices. For teenagers, the figure was even key industry players, are as follows. higher: four out of five. Thanks to these free-spending consumers, global sales of consumer electronics ● Converged devices excite consumers with were forecast to reach US$600bn in 2007, with the promise of a new digital lifestyle, but mobile phones, televisions and personal computers heightened expectations bring the risk of great (PCs) accounting for nearly one-half of that figure. disappointment if devices fail to live up to the However, this boom masks uneasiness at the heart of hype. For manufacturers, convergence promises new the consumer electronics business. high-growth market opportunities, along with new Traditional economics no longer make sense. technical and business challenges. Commoditisation of products has eroded revenue and forced companies to rethink their business model. ● The idea of a digital device that does more than At the same time, digital convergence is providing one function is highly persuasive. Nevertheless, opportunities for new products and services. vendors need to clearly establish a key value Making any content available over any network on proposition in the minds of potential buyers. If not, any device is immensely appealing, and new service consumers may decide that the converged product offerings seeking to straddle these boundaries are offers no real improvement on the old way of doing starting to appear. New business models are emerging things. to better reward those innovators that make the convergence dream a reality. ● Advances in technology mean that many of the As the communications and media industries drawbacks that have hindered converged devices converge, opportunities for consumer electronics in the past are now disappearing. The falling cost of firms to serve the digital home will expand. This is digital technology makes it feasible for the first time part of a broader trend towards a digital lifestyle, to build multifunctional devices for a mass market. characterised by media on the move, digital delivery Nevertheless, the commercial payback for some of media to the home and accessible media storage convergence offerings remains elusive. within the home. Nevertheless, there remain big technical, ● As well as spawning new devices, convergence commercial and legal barriers for the industries that is happening at the service and application level, stand to make the most from digital convergence— leading to new entrants and novel business models. consumer electronics, telecommunications, content In this new world order, intellectual property rights providers and software houses—and it will be some count for more than manufacturing might, and years before all players embrace the far-sweeping legal battles over intellectual property rights are business implications of this enormous commercial increasing. These disputes will distract resources that opportunity. could otherwise be dedicated to further innovation. 2 © The Economist Intelligence Unit 2008 Consumer electronics gets ready for change How convergence will drive new business models ● The future of the consumer electronics a dazzling pace, throwing up new challenges in industry looks bright, albeit marked by greater areas like interoperability and user interfaces. New turbulence as established brand names fight it business models will need to emerge to cope with the out with low-cost Asian manufacturers and new complex technical and commercial challenges that entrants. Technology will continue to evolve at convergence throws up. © The Economist Intelligence Unit 2008 3 Consumer electronics gets ready for change How convergence will drive new business models Introduction he current decade has seen the convergence commercial rewards. That is unpalatable medicine for dream move closer to reality. Digital technology many of the industry’s engineers and designers, who Thas made possible multifunctional devices that would rather “innovate than imitate”. It also calls into would have had consumers awestruck just a few years question the economics of having an extensive R&D ago. But the quickening pace of innovation keeps function. After all, why spend heavily on R&D if rival raising the bar on consumers’ expectations while firms can produce “me too” products at half the price? intense competition causes the window of opportunity The biggest challenge for vendors banging the to reduce each year. Meanwhile, the blurring of convergence drum is undoubtedly that too often industry boundaries that convergence causes, leads to their offerings fail to live up to the hype. Perhaps the new business models and upstart competitors. price is too high or the product too difficult to use. The pace of technological development is such Or perhaps the consumer has decided that it offers that products that once held consumers in rapture no real improvement on the old way of doing things. can turn almost overnight into mature markets However, the potential for digital convergence is characterised by low growth, minimal pricing power still largely untapped. The difficulty is going to be and cut-throat competition—the DVD player market in finding the convergence that is truly useful— is merely one recent example of this. To avoid such a something that the customer really wants as opposed fate, companies seek to create better products and to something that the R&D lab is able to develop. applications than the competition, thereby hopefully In this report, the Economist Intelligence Unit will commanding attractive prices. Apple did just that look at the state of the consumer electronics industry with the iPhone, charging a hefty US$599 to early today, and investigate how convergence of devices, adopters, but then quickly cutting the price to pre- content, services and applications is changing the empt the copycat competition. industry. We will also look at how the telecoms, Apple, once written off as an also-ran in the PC software, media and entertainment industries are business, has emerged as one of the most influential using convergence to redraft their business models, companies in consumer electronics thanks to its and what lessons the consumer electronics industry innovative business models and ground-breaking can draw from this. products. The iPhone is not the first mobile phone that can play music, but Apple managed to convince many Games lead the way consumers that it did so better than its rivals. It is easy to forget just how rapidly consumer In the consumer electronics business, you need electronics technology has advanced in recent years. to be fast, but not necessarily first. Innovative “Just go back five years and people would be amazed companies run the risk of delivering new features at what you can do with digital devices today,” says faster than customers can absorb them, or producing Ron Schaeffer, director of multimedia at Motorola. The products that are overly complex and expensive. games console is a good example. When introduced That leaves the door open for followers to make a in the 1990s, they were dedicated to playing games. simpler or cheaper version of the product and reap the Few would have predicted that games machines would 4 © The Economist Intelligence Unit 2008 Consumer electronics gets ready for change How convergence will drive new business models evolve into multifunctional entertainment centres “We asked ourselves how we could make the PSP that can connect to the Internet and play high- into a communications device, not just a gaming definition (HD) video and HiFi sound. device, and we decided that the answer was VoIP,” The portable version of the PlayStation, the PSP, says Steve Andrews, head of mobility and convergence is used by 24m people. In the UK there are more than at BT. Like other telephone companies, BT wants to 2m PSP owners and telecommunications company, BT, transform itself from a hardware-based, fixed-line hopes to harness this market. BT and Sony are poised telecoms provider into a software-based supplier of to launch a new wireless communications package telecoms and entertainment applications. that they have jointly developed for the PSP. Called Go The PSP deal benefits both parties, argues Mr Messenger, it enables PSP users to keep in touch with Andrews, as electronics manufacturers like Sony are each other using Voice over Internet Protocol (VoIP) also trying to reinvent themselves for the convergence technology, or with an optional video camera, to hold era. “Companies like Sony recognise that they can only video calls. go so far as a gaming machines manufacturer,” he says. The digital camera market continues to grow at a rate of more than 5% sphere as it would be too costly,” says Mr [per annum] in the UK and 8% globally,” Jacobson. is not standing still says Mr Randall. So, although consumers Additionally, DSC manufacturers may may be attracted to what is advertised on well look to source wireless connectivity the handset’s box, this is rarely enough for capabilities.

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