Consumer as king: A benign tyrant?

-October 26, 2004

The clanging of the three C's (computing, communications and consumer) has quieted after a decade of caterwauling. The categories have finally coalesced, replacing the discordance with the harmonic of a well-tuned engine.

The consumer era is born. And it's brought with it a tectonic shift in the electronics business that we are only now beginning to fathom. Bug-eyed buyers at The Good Guys, Best Buy and Wal-Mart are part of it, staggering behind shopping carts overloaded with electronic systems (razors) and the CDs, DVDs, game cartridges and disks (blades) to play on them. The hype rides perilously on a long, thin wire held by engineering innovators in all corners of the world.

"I want my MTV" has been replaced with "I want my gadgets. Now." Razor and blades have become hip iPods and 99-cent songs. It's astounding in one sense, but simply a part of a long continuum of innovation targeted directly at a larger and larger consuming public.

Just before the turn of the 20th century, a dapper Thomas Edison stared out from a magazine ad, saying, "I want to see a Phonograph in every American Home." The cylindrical phonograph, introduced in the late 1870s, arguably was the first great consumer gadget. By the century's end, the Edison Standard Phonograph was hitting the market. Prices had fallen from early-adopter tags of $150 ($2,930 in 2003 dollars) to $20 ($421) for the Standard model and $7.50 ($158) for a model known as the Gem, introduced in 1899.

Earlier, on a summer's day in 1827, a Frenchman named Joseph Nicephore Niepce captured the first fixed image. It took him about eight hours. Another Frenchman, Louis Jacques Mande Daguerre, was also experimenting with image capture. By 1839, he had gotten the exposure down under 30 minutes and kept the image from disappearing. Thus began the age of modern photography.

It took a bit longer for photography to become a consumer hit than for the phonograph, but by 1900 it was established. Around that time, Eastman Kodak Co. began selling the Brownie camera for $1 ($21 in 2003 money) and, in an eerie parallel to today's marketing techniques, advertised the box directly at "boys and girls."

Today, of course, we wear our music machines on our hips or on chains around our necks, and carry cameras in our phones. Should I call you from the top of the Eiffel Tower or just shoot you a photo of myself up there?

Mass market start
Flash back again to the 19th century. Eli Whitney, known largely for his invention of the cotton gin, was also instrumental in the push toward standardized manufacturing, absolutely crucial in the development of the mass market. He traveled to Washington with 10 pieces of each part of a musket. Whitney stood before the secretary of war and military officials, and proceeded to pick parts randomly from the pile and build 10 muskets.

Other factors occurring around this time would also contribute to the birth of the Cult of the Consumer. Between 1861 and 1890, the percentage of the U.S. population living west of the Mississippi River doubled, to 27 percent. Farms and ranches were sprouting up everywhere, as the Indian tribes were pacified, and goods that were increasingly built on standardized processes at humming East Coast factories had to get to those buyers. Aaron Montgomery Ward and Richard Warren Sears figured out how to market those goods and, astride the stretching tentacles of the nation's railroads, the supply chain was born.

Sound familiar? The transistor. The planar CMOS process. Commercial design tools. Standardization and innovation in point areas that grow into systems expertise and technological products that feed back into the innovation chain. The Internet is the Sears catalogue and FedEx is Union Pacific or the Pony Express. The farm wife's need for a clothes wringer next month is today's urge for a dryer, shipped overnight and installed. It's so easy and inexpensive, relatively speaking, to make one nowadays that manufacturers try to squeeze out more profit through extended-warranty plans.

There is a darker side to this cycle, though, and ours has yet to play itself out. A century ago, the innovation of the industrial age led to incredible social turmoil, not only in countries where humans became labor capital to drive the efficiencies of standardization and factories, but in countries where they didn't. The haves and the have-nots began to bang heads, culminating, many would argue, long after Whitney, Daguerre, Edison, Sears, Ward and others made their mark-in 1914, and the guns of August.

The social upheaval and terrorism that mark the 21st century are, in a sense, a sign of one world's frustration with watching the other, modernized world accelerate and acquire. A clash of cultures indeed. If one extends the Industrial Revolution analogy, we're in for decades of turmoil-but also decades of mind-blowing advancements.

Another odd disconnect amid this wonderful explosion of technological prowess: What has value has no value. A new personal computer loses its value faster than a car. Lost or damaged cell phones are replaced for . . . free. Digital cameras, which have taken the world by storm in just the past few years, are already becoming disposable.

Fatser pace
The adoption rate of consumer technologies quickens at every node. It took nearly 50 years for electricity to sizzle into 25 percent of U.S. homes, while the telephone, which emerged not long thereafter, took 35 years to reach the same penetration. Radio moved into a quarter of our homes in 22 years, the TV in 26, the PC in 15, the cell phone in 15 and the Internet in seven. That dwindling penetration time comes as the population has grown tremendously over the same period. Now, the DVD recorder, introduced in 2002, is forecast to reach 25 percent penetration just five years after launch.

As the technology has changed, so has the business around it, in some ways bracingly so.

When Wilf Corrigan was starting out in the semiconductor business, in the 1960s, he oversaw transistor development for Motorola. Then, the consumer market was the Midwest, where TV manufacturers like Sony, Warwick, Zenith and Magnavox all had operations and their own retail stores. As color TV ramped, companies offshored the manufacturing of black-and-white TVs to Japan-first the tuners, then the chassis, then the whole set. That was OK because the big profits-and the engineering value-add-were in the color sets. Pretty soon, that color business went to Japan, too.

"Within a space of five years-it was really that short-all the business moved to Japan," said Corrigan, now the chairman and CEO of LSI Logic Corp. "So, 25 percent of my business disappeared into Japan, and pretty quickly the component business disappeared into Japan."

Today, offshoring is well-documented, with lower-value activities sent to countries with competent but lower-cost technical-labor forces. The big change, however, is in distribution: Hewlett-Packard is selling Apple's iPod. Dell is selling flat-panel TVs. So "You've not only got disruptive technology. You've got disruptive channels of distribution," Corrigan said.

Dell can make 8 percent operating profit on 20 percent gross margins, Corrigan pointed out. "If you're a Japanese company that needs to make 30 to 40 percent gross margins just to make a profit, that's a pretty tough environment," he added. "So you've got a series of fairly massive changes going on."

To a large degree, semiconductor companies are already savvy to the consumer market. In the old days, Japan told them how to build their transistors and chip sets to get designed into that market. Today, the semiconductor company not only hands off the silicon, but also a reference design, manufacturing kit, and sales and technical support.

And you've got consumables. A digital camera can cost less than $100 in some rare cases, but if you want any sort of capacity, you're buying $100 to $200 worth of flash memory to store your pictures on, Corrigan points out.

"They're not Kodak consumables. And even if you want to print your pictures, you're using an HP printer," he said.

The consumer has been primed for innovation; indeed, he or she demands it now. Those adoption rates will quicken even further and the demands on design concept and manufacturing prowess will be pushed mightily down the chain.

We're only beginning to guess how this will affect the 40-year-old electronics industry. The smart money bets on software, since hardware technology is fast becoming as easy to make as it is empowering to use. Software will become the key differentiator. Ultimately, time-to-market and those adoption rates will be restrained only by the "time-to-dream."

For now, it's time to put on the wireless headphones, sit back in the recliner with the remote, fire up the flat screen and watch it all unfold.

Loading comments...

Write a Comment

To comment please Log In