Consumer electronics industry faces disaster

Consumer electronics industry faces disaster, academic says Commoditization could reshape the industry in the next few years

News Story by Paul Kallender

FEBRUARY 16, 2005 (IDG NEWS SERVICE) - The impending era of digitally networked homes will cause potentially devastating problems as well as golden opportunities for the consumer electronics industry, a senior academic said at a conference on Monday.

After an initial bonanza from new generations of products and services, commoditization could lead to the disintegration of the electronics industry as we know it, according to Eli Noam, professor of economics and finance at Columbia Business School. He spoke before an audience attending the Global Information Summit 2005 in Tokyo this week.

The digitalization of nearly every device from TVs to audio devices, mobile phones and cameras holds electronics makers hostage to Moore's Law -- the idea proposed by Intel Corp.'s Gordon Moore that computer chip power doubles every 18 months or so. As chips become more powerful, many stand-alone products -- such as Blu-ray Disc players, TVs and PCs -- may not be needed and "disappear," Noam said.

A look at today's consumer electronics products shows this is already happening. Consumer PCs now come equipped with TV and recording functions. Vendors have combined DVD, CD and VHS players into single units that have hard disk drives. This week, not satisfied with adding cameras to their products, mobile phone vendors Nokia Corp. and Sony Ericsson Mobile Communications AB announced that they will equip handsets with sophisticated music player functions.

The market for networked products for the home, which includes home servers, flat-panel displays and next-generation optical recorder and player equipment, could be worth hundreds of billions of dollars for vendors during the next seven years, Noam said.

But after that, profits could "disintegrate" for consumer electronics companies because many of the networked products now being developed will be replaced by a single box or hub. Around the home, people may interact with only a few thin clients, such as display screens, that will be wirelessly connected to a central computing system, he said.

"The good news is that this will mean an initial spike in demand for makers. But it also means fewer hardware boxes being sold," Noam said.

At some point, even the thin clients and hubs will become commodity items mass produced by any number of companies, not just consumer electronics giants such as Sony Corp. or Matsushita Electric Industrial Co. So, after spending billions of dollars developing ever-more powerful chips, technologies and products, electronics companies will find it difficult to make profits, Noam said.

"Twenty years ago, IBM offered a home network, and it cost $20,000. Now it costs a few hundred. ... Chronic price deflation shows no sign of abating," he said.

Because they will be used at home, home networks and products will have to be reliable, easy to use and glitch-free, he said. That will create new opportunities that arise from the need to service home networks, he said. A breed of specialized service vendors, called CSPs, or Consumer Electronics Service Providers, could emerge. These vendors would knit together home, community and work-based networks, providing services based around contents provision, security and assurance, he said.

Eventually, even those services will be commoditized, spelling more difficulties for the industry, Noam said.