Is Electronics a Hits Business?

The Samsung profit forecast that we mentioned in last week’s Display Monitor emphasises that not all is gloom and doom in the electronic business (although it mostly is at the moment!).

It did get me thinking about the changes in the electronics business in the last few years. Increasingly, the business has become a ‘hits’ business. It was not always this way.

A long way back in time, companies really had to work very hard over long periods to build up sales channels for business. Information about products was really only available through those sales channels and advice on the best product or best brand came from the experience of the retailer and perhaps the close associates of the buyer. Business was hard to win, but relatively slow to lose.

The increase in media outlets and especially the arrival of the internet meant a dramatic change in the ease of communicating information. When I started Display Monitor, going to trade shows such as Comdex was one of the few ways of collecting authoritative product information efficiently. I even used to take a list of questions for vendors about IT products that I might have been thinking of buying for the office or that we were using.

This changed with the arrival of the web in its current form. Buyers could check specifications and start to look for deals around the world (I bought my first PC direct from the US around 15 years ago). It’s five years or more since I did a report for a general consumer electronics title on a US trade show. I attended and added a handful of stories and pictures, while most of the work was done by staff back in the UK who were glued to their browsers.

Then the arrival of all the media that really depended on the internet started to arrive and here I’m thinking of the online review databases, the blogs, the online user reviews and, more recently, social media that allows product to be ‘liked’. These have combined to create much more of a ‘winner takes all’ environment for hardware companies. Just like getting a hit song, you can get a hit electronics product.

That got me thinking about how this effect may change the hardware industry even more than it has so far. The electronics business, traditionally, was vertically integrated, with R&D, design, manufacturing and marketing in the monolithic companies (many of them Japanese).

If you look at businesses that have been based on the idea that products need to be ‘hits’ – and here I’m thinking of cinema or music, in particular, products are created by teams of people coming together for more or less a single product creation and then dispersing again. There are exceptions to that model (I’m thinking here of Lucasfilm, makers of the Star Wars franchise), but most films are put together by a director, actors and other creative professionals that are together for just that event.

The chip business is also something like this. Get the right technology pieces together and you can sell a lot of chips and make a lot of money. The industry has developed the model of ‘fabless’ semiconductor companies that can move quickly and focus on the design and development of chips, rather than the manufacturing processes. Teams are split and re-assemble in Silicon Valley looking for the next ‘hit’ technology.

In some ways, the Apple model is based largely on the same concept. We don’t talk about ‘fabless electronics’, and Apple does have some real electronics design business units (it puts together the building blocks from Arm and Imagination for its Ax chips, used in its iPads and iPhones, for example), but Apple does sub-contract the manufacturing and most of the component engineering and supply.

Samsung, on the other hand, is massively vertically integrated and still is turning out ‘hit’ products. That’s a great achievement. However, this week’s front page highlights another company with deep engineering roots, HP, that is increasingly looking as though it is not sure where the next hit is coming from.

The big question is whether a vertically-integrated company such as Samsung can continue to churn out the ‘hit’ products needed to feed its huge manufacturing and production engine.