A Mixed and Uncertain Electronics Retail Landscape

As if we didn’t all know it already, the economy continues to be tough and continues to weigh down the consumer electronics space. The Commerce department announced today that retail sales were down 0.4% in April amidst expectations of a flat result. The Commerce Department specifically cited electronics stores as one of the declining categories.

This was probably most directly caused by the exit of one of the majors, Circuit City. Regionals are filling some of that void, with Conn’s reporting slight growth on some new store openings and PC Richard taking over a handful of stores from CC in the NY metro area in April.

But overall, consumers are bargain hunting right now, as seen in the shift in channel mix. As you might expect, Wal-mart is benefiting from the economic environment. The world’s largest retailer reported same store sales growth of more than 5% in April. And while BJ’s and Costco both reported declines in revenue, Costco reported price erosion of 38%, which would offset even significant growth in unit volumes.

Consumers are also going online. Amazon recently reported a boost of 38% in Electronics sales to over $2B in Q1, primarily fueled by continuing investment in free shipping offers.

What does all this mean for Electronics manufacturers? It means you’ve got to be looking at online and discount channels more than ever. Online sales supported by free shipping and deep discounts are the flavor of the day. As manufacturers look at cutting back on costs, they've got to be very careful about selecting which channels and promotions are going to give the best returns. Integrated channel strategies and promotion schedules are needed to be successful at doing more with less.

IBM @ Mobile Internet World 2008, Boston

At the end of October, many of the leading mobile internet players like Google, Yahoo, Intel, Qualcomm, Ericsson, T-Mobile and many others have gathered in Boston to discuss the state of the industry and the way forward to turn the hype into reality. We have shared the results from our recent mobile internet consumer survey with conference attendees on Thursday Oct 24th. Maybe we have also met at our booth on the show floor …

One thing is very clear from my perspective: even though the new economic environment may have a short-term impact on the speed of mobile internet adoption, mobility and connectivity go hand in hand and are set to last. Realistically, I do not see a way around this trend. For sure the industry still has to overcome some of the most significant challenges when it comes to spurring demand amongst consumers and enterprises:

1. Introducing affordable mobile internet flat rate tariffs
From my own humble experience, I know that mobile internet can get very expensive. Especially if you are still on an "old" contract that charges data traffic in terms of kilobyte or online time. But even more so, those devices have lives of their own ... they tend to connect to the internet through a GSM connection to get downloads for weather or software updates and so on. The user in many ways is not even aware of that and faces a major surprise at the end of the month with an exorbitant mobile phone bill coming in. Making the cost related to mobile internet transparent and controllable will be critical to success. It needs to be on the same level as flatrates for the "fixed" internet.

2. Enabling high speed down- and uploads
If you have ever used the internet on your mobile device, you will probably agree with me that sometimes it is not the most pleasant experience you can have. Pages are still loading slower than people are used to from their internet at home or at work. Of course the industry – especially the mobile operators and the network equipment providers – have put significant investments in making the mobile networks more reliable and faster … and certainly we have made gigantic leaps since the first and second generation networks … but still one has to confess, it is noticeably slower than “fixed” internet.

Sometimes I think, consumers (and I include myself here) are just spoiled in terms of expectations for mobile data speeds. 3.5G networks are well underway and 4G are in the planning – the question remains how operators with a tough economic outlook and probably lower consumer spending on communication ahead, will put or not put investments into such a network upgrade. Last thing I want to note here is that sometimes the device itself is a bottleneck in terms of page load time: at home I typically have my device hooked up to my Wi-fi network and you know what … it is loading pages much slower than my laptop being hooked to the exact same network. So I guess it has something to do also with the device processor, graphics engine and available memory. Some work to do here for the industry

3. Improving the user experience through better input and output interfaces
The form factor for a mobile device is somewhat constraint to make it fit into your pocket. The are some devices that are a little bit larger (like the iPhone) and others are a bit smaller (like the HTC Touch Diamond) … but most of them are in the same ball park when it comes to dimensions and weight. If you would make those devices larger, then you call it an Ultra Mobile PC or EeePC. So increasing the size won’t work! But still consumers complain about the small screen and about entering data. So you are trapped here – how to solve this gordian knot? Take a big knife and cut it through? Maybe one idea could be to finally have those already available nano projectors embedded in mobile devices. Those nano projectors really have the capability to project a decent quality to a spot on the table or wall or sheet of paper. This would maximize the output size by keeping the form factor of the device itself! And now how about entering data in a more convenient way: maybe some of you have seen those laser keyboards?! Allowedly, those are not really good to use – but I am convinced that some clever engineers can find a way to develop reliable virtual keyboards (again on table, or on a sheet of paper) and hence improve the way how consumers can enter data in the device.

Take it as a couple of provoking thoughts … looking forward to your comments!

If you want to check our Dr. Lee’s and my interview from Mobile Internet World … here you go: http://www.bnettv.com/player.php?id=1865&title=IBM%20-%20Dr%20Sungyoul%20Lee%20&%20Christian%20Seider

Regards Christian

Mobile internet - the next big thing for mobile device makers?

Few days ago, we have released a new study which reveals 80 percent of consumers would prefer a service provider that gave them more choice in the applications and services available on their mobile device. The study, titled, “Go mobile, grow” produced by the IBM Institute for Business Value points to how consumer demand for customization and personalization will drive innovation and open standards in the mobile marketplace.

The mobile web provides people with access to the Internet anytime and anywhere. The market for mobile Internet services is estimated to reach US$80 billion by 2011, with increasing usage expected to fuel growth in both the provision of services and mobile Internet advertising.1 At the same time, the number of mobile Internet users worldwide is projected to approach 1 billion, a 191 percent increase from 2006 and a compound annual growth rate of 24 percent.2 The ubiquitous availability of IP wireless broadband and more affordable advanced smart phones will change the way companies around the world operate and relate to their customers, employees and partners.

We surveyed nearly 700 consumers around the world on their preferences regarding the mobile internet. 69 percent of consumers reported they want devices that are open to personalization and configuration of applications.

Our survey found the mobile web will increasingly be used for utility and transactional services. For example, nearly 60 percent of consumers are interested in banking via mobile devices. Other utility services include e-mail, instant messaging, stock trading, news and information and general browsing. Also, entertainment applications are growing in popularity with our study finding 53 percent of consumers interested in mobile TV and 45 percent interest in buying music via mobile devices.

“Clearly the same market forces which empowered consumers to choose personal computers that were open and enabled them to customize their applications are at play in the mobile web marketplace,” said Dr. Sungyoul Lee, Global Consulting Leader, Electronics Industry, IBM. “Our survey found 60 percent of consumers do not have a specific brand preference when using mobile Internet services. With consumer clamoring for choice, the marketplace will need to innovate around open platforms and models to build loyalty.”

Markets around the world will adopt the mobile web differently. In mature markets, we predict the Mobile Web will extend and complement the personal computer. While in emerging markets like India and China, consumers are skipping their first PC purchase and going straight to high end mobile platforms that deliver the same service. We also predict that in semi-literate populations, people will use low cost mobile phones, whose user interface will be voice-based, which will greatly expand their connectivity to people and data.


Implications and Recommendations for Mobile Device Makers

Our study, points to a number challenges which Mobile Device Makers (MDMs) will face in the “Era of the Mobile Web”. In particular, competition with established Internet brands looking to the mobile web as a source of potential revenue poses a huge challenge. Also, existing business relationships and channel conflicts will be a major obstacle as MDMs could be perceived as threats to offerings by their network partners and impact the core device business of MDMs.

“These challenges from portal players and mobile network operators will force MDMs to compete where they excel most by delivering innovation that wows consumers,” said Dr. Lee. “Mobile device makers, confronted by numerous challenges to growth and profitability, need to develop new avenues to expand their core offerings. At the moment, the mobile internet market is still somewhat fragmented. But it is unlikely to stay that way for long. The time to act is now.”

Based on the consumer survey results and further analysis by, our study identifies a number of factors which will help MDMs secure market share in the mobile internet space. Namely, a focus on driving their design and business models based directly on consumer insights will be vital. Also, the development of a participation in a standards-based, open ecosystem for devices and services will be a boon for innovation.

To take advantage of the opportunities offered by the mobile Internet, the study says many MDMs may need to transform from device-driven to service-driven. This may require changes in marketing and brand perception, partnership strategies, content delivery and management, as well as revenue models. This transformation in business model will also require a scalable and cost-efficient infrastructure that enables them to rapidly ramp up services. This may include looking at the benefits of partnering with a third party (e.g. outsourcing partner, system integrator, etc.) in order to bring in the necessary expertise, while still keeping the costs low.

Handset sales have reached saturation point in emerging markets therefore compelling MDMs to move to higher end devices that enable more services. This could bring a double boost to earnings and revenue as it raises the average device price point and provides MDMs a cross sell opportunity to high margin services.

As part of our ongoing consumer research efforts, we are making the full report “Go mobile, grow” available at: http://www-935.ibm.com/services/us/index.wss/ibvstudy/gbs/a1029693?cntxt=a1000050

The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.

Mobile World Congress 2008 - IBM Videoblog

After Mobile World Congress is before Mobile World Congress ... so let's take a look back at what happened in Barcelona a few weeks ago.

We had the unique opportunity to present our Network Equipment Provider study to many clients, press and analysts and this videoblog is summarizing some of the key findings as well as shots from the Fira in Barcelona.

Sometimes, pictures say more than a 1,000 words, and moving pictures are yet better ... but since we are not satisfied even with that ;-) ... we also included some audio comments and some key charts from our study in the below videoblog.

Hope you enjoy it!

The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.

NEPs to gather at Mobile World Congress in Barcelona

Mobile World Congress, the world largest conference for mobile communication will be opening its gates soon in Barcelona (Feb 11 to 14th).

Traditionally this is the main event for telco operators but also most of the large Network Equipment Providers (NEPs) will be exhibiting to showcase their leading edge communication solutions.

IBM will have its booth at hall 1, booth 1C31. Come and visit us there!

George Bailey - our Electronics industry GM - will be present at the show and will be unveiling the findings from our recent NEP study (And then there were few) to our clients in private briefings during Mobile World.

George will describe the exciting dynamics in the NEP ecosystem and how it may unfold across the next decade. You don't wanna miss this opportunity ...

Will the consolidation among Network Equipment Providers continue?

The recent Q3 financial reporting showed that the Network Equipment Provider (NEP) segment of the electronics industry is still a volatile one. The NEP segment is highly dependent on the investment behaviours of service providers (like telco operators) and enterprise customers.

It was not a major surprise that the trouble for Alcatel-Lucent continues. ALU reported a third-quarter loss of Euro 258 million (~ $361 million), which represents a year-over-year reduction of 8% and which was even worse than its previous earnings warnings!

However, what was a major surprise is that Ericsson - usually known to deliver consistent results – reported a 36% reduction in net income. Carl-Henric Svanberg (Ericsson’s CEO) said that this was mainly due to weaker sales of mobile network upgrades and expansions. In contrast to that negative news, Cisco reported a strong 27.5% YoY increase in net income and 25% increase in net sales.

Furthermore, Cisco is serving the enterprise segment (for the most part) while Ericsson and ALU are focussing on service providers. But as networks are increasingly being transformed towards Next-Generation Networks (networks that are fully IP-based), I believe it is fair to compare the performance of these players in the same category.

If we consider what has been happening since the dotcom collapse, many large NEPs have disappeared because they have been acquired by or merged with competitors. Just look at Alcatel-Lucent’s merger, the Nokia-Siemens Networks joint venture, the acquisition of Marconi by Ericsson, or Cisco’s recent acquisitions, and so on. After the crash NEPs began to agressively consolidate for the first time in their long history.

There are many good reasons that the NEP consolidation is expected to continue: slowdown in market growth, new entrants (especially low-cost providers) creating price pressures for incumbents, leveraging of economies of scale to improve operational efficiencies, continuing regulatory evolutions for the communications industry and technology standardization that enables players to integrate their solutions more easily.

However, there is still one lingering issue. NEPs clearly need to find a more sustainable business model to keep the market happy. One option may be to ramp up the network-related services business – particularly managed services - to enable a continuous revenue stream and to compensate the volatility of the equipment business. The focus on software will certainly increase as well. Many NEPs may soon find that their equipment-heritage business model is transforming towards a software and services model. Even though the focus may shift, NEPs cannot afford to neglect their business based on equipment. They will need to continue to develop innovative and value-adding solutions which are based on differentiating bundles of equipment, software and services. Not a revolutionary insight, but that’s what it will come down to.

One thing I say is for sure: there will be more news coming in the M&A section of your newspaper … watch out for it!

If you would like to read more about the NEP industry, here is something that you might find interesting. It is a recent IBM study about how the NEP industry is changing.

Go Direct Young Man

In 1999, disintermediation was going to make the internet king and bricks irrelevant. By 2005, Best Buy Walmart and Circuit City controlled 50% of consumer electronics spending in the US. The consolidation is accelerating even faster in China where GoMe expects its market leading revenue position to grow by 80% this year. Similar situations are popping up across Europe and yes, even in Japan. As any retail industry insider will tell you, there is less than 10% margin in any retail consumer sector with this kind of consolidation… and furthermore the retailers are very good at getting more than 50% of the total profit margin. That leaves the CE players with no more than 5%. And if you follow the CE industry you know that 5% reflects amazing performance by a manufacturer.

But how then does Apple maintain 17% margins in its retail channels? OK, yes, the product is good. And the marketing will tell you that the device is integrated to iTunes, even though the online experience tells you otherwise. But more interestingly, Apple also pushes nearly 20% of its revenue through its direct channel. That is part of the reason they hold prices closer to MSRP in retail than their competitors do, and therefore their products actually realize the margins that corporate strategists plan for.

And perhaps this is also why I’ve seen more calls for help from CE companies in trying to figure out how better to go direct. Here we are in 2007 and the industry is back on the path of disintermediation. How else can they invest in new chip and panel factories or double down on investments in R&D? The electronics product and service landscape evolves rapidly nowadays and 3% net margins just don’t justify the investment costs and risks.

And so these SAP R3 supply chain companies are now focused on becoming consumer companies and sometimes internet services companies. It’s the right move. The accent moves from “electronics” to “consumer”. But this is harder than you might think for such an engineering-manufacturing dominated culture. Most of these companies have great understanding of the inventory and supply chain modules of their ERP systems. Few understand the CRM modules, unless you interpret the C to be customers, as in distribution partners. Everywhere I go, I am asked about the right business model for going direct. Do we need CTO? Should we be acquiring content delivery capabilities? How do I market to social communities? What other web 2.0 stuff can I be doing?

My answer to these myriad questions is singular. What do your consumers want? Get to know them. Ask them. Test them. Analyze them. Predict their wants and needs. That’s what the leading retailers do. You’re not just a manufacturer anymore. Your supply chain is important, but no longer differentiating. You need to connect with your consumers. Like Apple does.