Looking at the cornucopia of new product announcements coming out of the Consumer Electronics Show this week, and the market projections targeting these applications, you would think that it is the best of all possible worlds for developers of consumer devices.
Nothing could be further from the truth, despite the optimistic message from the CEA projecting that consumer electronics sales could top $1 trillion in 2011. What comes to mind when I hear and read about such optimistic projections is an image of Mad Comics’ Alfred E. Newman caricature titled “What, me worry? ”
I am doubtful about that $1 trillion prediction. But even if it turns out to be true, the more important numbers to look at in the consumer market are the profit margins, not just of the companies selling the devices, but of the companies providing the various hardware and software building blocks from which they are created. And what I see is paper-thin profit margins all around, more reminiscent of the tenths of a cent difference between profit and loss common in the U.S. supermarket industry.
You may think that such slim profit margins are tolerable if the volumes are there. But will they be? A lot of the optimistic chatter assumes that the current economic downturn will end soon and the electronics-mad consuming public – especially in the United States – will return to its profligate buying habits of the previous two decades.
Not true. U.S. consumers have dug a deep financial hole that will take a while to get out of. When the “great recession of 2008-201X” first hit us globally, the numbers for the personal debt of the average U.S. household were truly frightening.
In 1974 total U.S. private household debt was $680 billion, about twice theU.S. government debt. By 2006 it had grown $12.8 trillion, four times the debt of the U.S. government . Also, the average household in 2008 owned 13 credit cards, with 40 percent of them carrying a balance, compared one credit card per familywith just six percent carrying a balance in 1974.
Just as troubling has been the savings rate. In the mid-1970s U.S. consumers were setting aside about 14 percent of their disposable income into savings. But for most of the last decade since 2000, it has hovered at about one percent, several times dropping to near zero.Indeed, just before the downturn, the personal savings rate and sunk below zero into the negative range andby 2008, U.S. consumers were spending $800 billion more than they earned, much of that generated by borrowing against the mortgages on their homes, the value of which lenders had convinced them were going to continue to climb.
As a result of the house mortgage debacle that triggered a worldwide economic downturn, unemployment in the U.S. is hovering at about 10 percent. Not only are these unemployed not spending money on consumer electronics devices, the other 90 percent who are still employed are becoming much more conservative financially, and working feverishly – not to buy more consumer electronics devices and toys – but to pay off their debts as well as set aside monies for future disasters. That is reflected in the reversal in the trend on personal savings in the U.S, which by the beginning of 2010 has increased four fold from the 1% rate or less during the previous ten years.
Gone are the days where clever advertising and promotion could be used to convince a consumer that he or she desperately needs to buy the hottest new electronic device. The only thing that will change this is cost. Almost nothing I saw or read about CES this year – 3D TV, large screen LCD TV, Internet TV, mobile TV, wirelessly connected netbooks, tablet PCs, and home entertainment systems – was compelling enough to tempt a consumer to pay a substantial amount to acquire it. While the just past Christmas season was one of the best in years for mass market retailers, many of the sales of electronic devices were heavily discounted, including the much talked about and hyped 3D TV.
The one exception that I have seen to this trend is in mobile wireless phones, but not because they have features and services that consumers are convinced they must have and for which they are willing to pay, such as mobile TV and mobile video conferencing . The customers that most electronics hardware and software vendors deal with are the mobile phone service providers who are the channels through which most of these smartphones will get into the hands of user. And these providers are adopting a market strategy that hides the true cost of such a device.
Originated in the mid 19th century to sell those newfangled razors with replaceable blades, this strategy, variously called loss-leader or freebie marketing, is a business model familiar to the electronics industry. In it, one item is sold at a low price, or given away free, in order to increase sales of complementary items, usually in the form of supplies or services. Examples of this include ink cartridges for low cost inkjet printers, game cartridges for low cost game consoles, test strips for free glucose testers, even extra features on desktop and portable computers.
In the mobile phone market, particularly in the high end smartphone segment, consumers are not going to have to pay the true cost. Most of it will be absorbed by the mobile phone service providers who are willing to continue to pay for developing and deploying a variety of features on their devices – such as mobile TV, conferencing, messaging, and internet browsing – gambling that they will make back the costs of such development in what they can charge for online services.
Indeed, even now, they often give away such features and capabilities in the handsets they sell to their customers, whether the customers want them or not. When I bought my most recent cell phone, all I wanted was basic phone services. I wanted a low end phone with that and nothing more. But several of the service providers I talked to did not sell such devices, their lowest end devices including features I did not want such as GPS and built-in cameras, but at a price they said was no higher than the low end devices they used to sell without those features.
But such strategies will not work on the vast majority of consumer electronics products in the new, more frugal market environment where potential customers will be more concerned with paying off debts and setting aside savings than paying out a lot for the hottest new device. Generally, executives of companies still actively involved in the consumer electronics market, tell me they are placing great hopes in pickup in consumer spending in countries outside the U.S.
But the big questions are: How long will the new more frugal mindset last in the U.S.? And how long will it take for consumers in other countries to reverse their decade- long debt-averse habits, especially since the current crippling worldwide recession has proved the wisdom of their habits? Well, the 1920s was an era of optimism about the future, but the depression of the 1930s fundamentally changed the habits of those who went through it, and held sway well into the 1970s.
For however long it lasts, consumer electronics companies will ultimately have to depend on the ability of developers to create ever more powerful consumer products at lower cost just to maintain current growth rates. I have some ideas about where those opportunities are and will talk about them in later columns. For now, I would like to hear from you. (Embedded.com Editor Bernard Cole, , 928-525-9087 )