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Kleisterlee Looks To New Business Models

Berlin, Germany – The consumer electronics industry must adapt new business models in the face of “powerful new factors” that invalidate “a business as usual approach,” Gerard Kleisterlee, Royal Philips Electronics CEO stated in an opening keynote address during the recent 2003 Internationale Funkausstellung, here.

Kleisterlee, whose remarks reflected “the shape of things to come,” told showgoers that fierce competition from new entrants to the market, rapid price erosion and low growth, are the central issues threatening established players in the global consumer electronics business.

Kleisterlee pointed to the DVD player, “the most successful home electronics device of the last 50 years,” as an example of how “the step-change” in competition has collapsed prices by a factor of 10.

“Developing a product like this is much like climbing a mountain – once you’re the first one to do it; everyone else wants to join in too,” Kleisterless said.

The pace of competition has intensified “to a point where true innovators investing heavily in R&D have less and less time to enjoy the fruits of their labors before me-too producers catch up.”

As a result consumer electronics companies must operate flexible organizations that are global and able to “adapt design, manufacturing and above all marketing to local and regional conditions,” Kleisterlee said.

Instead of launching new products into increasingly saturated markets, he said leaders “have to be able to launch whole categories and create entire new markets where none existed before.”

The new business models will rest on three central pillars including: high speed, continuous innovation; flexible organizations, and “new categories that redefine the borders of consumer electronics to generate growth.”

A central theme in Philips’ new direction revolves around wireless connectivity “that is replacing the familiar clutter of domestic devices I called the age of the box,” Kleisterlee said. Philips, he said, is now expanding on its Connect Home concept by launching its “Connected Planet” initiative.”

The concept, which emerged from Philips’ HomeLab development program and is earmarked for 2005 and beyond, is “a driving vision” for a new category which will enable consumers to access information, entertainment and data on the move as well as in the home.

Philips, he said, invests almost $2.5 billion a year on R&D, and places “great importance” on protecting and enforcing intellectual property rights.

The company recognizes that in the connected world interconnectivity and interoperability of electronics devices will be essential, so Kleisterlee said Philips has become an “anchor member” of the 17-member Digital Home Working Group that ensures compatibility of consumer devices within the home.

In addition to Windows, he said, “you will see us supporting Linux,” adding that Philips and seven other companies are developing an CE Linux standard in the CE Linus Forum (CELF).

He said Philips is “evolving into a more flexible composition of parts,” that will employ new business models based upon alliances and partnerships.

Kleisterlee pointed to recent alliances with major telecom providers in Europe and elsewhere as an illustration of how Philips is using partnerships to create whole new categories.

“We work with telcos and content providers, packaging their services and entertainment with our equipment to give us a whole new marketplace in the world of PC-less broadband, and a different revenue model based on long-term partnerships. So, we’re not selling boxes any longer: we’re service platform providers.”

By Christmas, Philips will launch with Deutsche Telekom a pilot “connected music package,” bundling DT’s broadband service and wireless home networks with the Philips Streamium 250 Internet audio system. He added, Philips would build on that product to add other broadband connected devices and service across Germany in 2004.

“Faced with ever more agile competition, our solution is to seek greater flexibility and to create new market categories where we can exercise leadership,” Kleisterlee said. “ We have chosen to go our own way. You will see Philips begin to diverge in important respects from the paths chosen by competitors like Samsung, Matsushita or Sony.”