Profitless Prosperity?

The much awaited CES show is finally coming to an end, and as expected it created a lot of hype, buzz and some distorted form of reality. Michael Dell, Bill Gates, Carly Fiorina – all those who normally attended the computer shows came and hawked their wares, and what I call the start of yet another chapter in technology industry’s profitless prosperity.

I will get into this a bit later, but here is a tiny background. In March 2003, I wrote a piece called, The Death of a Cheerleader for Salon magazine. At the very end of the article, here is what I had to say..

> And instead of being all about the investor, the tech boom has now become all about the consumer. Cisco, which for years has provided the plumbing for the Internet, recently spent $500 million to buy a company that sells WiFi products to consumers. After all, how many more Internet routers can it sell? Cisco now advertises its wares on prime-time television, while Intel hawks its goods in Vanity Fair. Blokes get their MP3 player tips from Maxim, and girls buy Sony Clie’s because they are cute.

(It is a whole different story that most of the business press is writing about it, but never mind.) Since then a lot of Silicon Valley companies have realized that there is money to be made, if they can harness the power of commoditization, a trend I have labeled, Moore’s Claw. I said so as much in my recent Business 2.0 story, The Rise of The Instant Company. In this piece I outlined why small companies could get into new product business and if done smartly, could make a decent living by combining smarts and commodity products. Silicon Valley giants are following that road map, but in the opposite direction. Which is where I come back to the concept of Profitless Prosperity.

Lets start with HP and Gateway. These folks are trying to sell LCD televisions, Plasma screens, DVD players, and Media Center computers. Blah! Blah! Blah! One small problem – they cannot do this and make money. These two companies, for instance have failed to make a profit on their core personal computer businesses, where they have inherent advantages over rivals like say Japanese consumer electronics companies.

In the consumer electronics marketplace, they (which I mean computer-based companies) have little or no brand presence. After all why would I choose Planar over JVC or Sony Plasma screen TV (considering that they get their raw components from one or two sources which are shared by all). The consumer electronics companies have a better track record of selling televisions, CD players and DVD players.

They know how to support these products, have a business model which is based on single digit profit margins, and have the inbuilt advantage: consumers know that Panasonic would not change its mind about TVs, but Gateway might. (Anyone remember their 30-inch TV from the late 1990s?) Dell, however is a slightly different story. It has a consistent record, does not start selling new products to bail out a month or two later, has great service/support arm, and knows how to live with single digit margins.

I am going to take this argument a little bit further. Okay now if you everyone from HP to Dell to Planar to Viewsonic selling the same products say televisions, media centers, and personal movie players based on commodity components, there is very little differentiation. I have seen it again, whenever there is little differentiation, and there are too many players, prices collapse. And that leads to profitless prosperity.

One man who seems to agree with my outlook is Pip Coburn, the erudite technology strategist at UBS. “There’s tremendous hype. The IT companies, with no growth in their current market, are pretending there’s a digital consumer revolution. But it’s very early, and a small part of the whole pie,” he told Barron’s. (Actually this is a great round-up of CES.)

But as Bill gates noted in his key note at CES, this is going to be a great time to be a consumer. Investors, however are screwed.


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