Sony and Casio Communications delivered a jolt to the residential and SOHO phone markets when they announced intentions to withdraw from the market.
Sony, among the industry’s top five phone suppliers in units and dollars, cited steep price erosion and a redirection of its focus toward home networking, as the reasons for hanging up on phones. A Casio spokesman cited price competition. Casio’s PhoneMate products are not among the top five in either unit or dollar share.
“The future of the residential telephone market is such that we couldn’t justify the cost in investing and engineering,” said Phil Petescia, Sony VP for audio/video accessories and telecom products. Petescia said price erosion of up to 15-25 percent each year had whittled away profits and forced Sony to evaluate the market’s future.
“This is a declining business. It hasn’t been a strong category for Sony for the past few years and doesn’t fit into our long-term home networking strategy,” Petescia said.
“We’re not saying that the residential phone will be totally replaced by home networking but that the core technology — transmitting data wirelessly — is the same for both. So we didn’t want to concentrate our strengths on a retro product or a retro business.”
Sony will stock current product lines through the holiday season and then officially pull the cord at year’s end. Casio will discontinue PhoneMate operations by the middle of 2002.
The move by Sony, though grist for the rumor mill for some time, took many by surprise. “Anytime a company this big gets out of a category, it’s a surprise,” said Mark Balinksy, Toshiba marketing manager.
“I’m surprised they’ve pulled out totally, though I’m not surprised by their emphasis on home networking,” said Isaac Levy, GM of Siemens’s cordless products division.
“I’m disappointed Sony’s getting out of the business,” said Steve Child, VP at R.C. Willey Home Furnishings. “Anytime you have the clout and visibility of a Sony in a category, their departure could make the total category smaller.”
The twin departures have raised questions about the future direction of the phone market, which is expected to sell 45 million units this year. Emerging technologies such as VoIP and home networking point toward a landscape in which broadband and phone technologies will converge.
“The question is: ‘What is the next technology that will drive home telecom?'” said Al Silverberg, Uniden president and CEO. “Sony thinks it’s home networking, and it could be that or other competing technologies. But home telephones are not going away, and though the face of home telephones may change over the years, certainly the 100 million households that have a phone will still use something to communicate by voice.”
Siemens’s Levy concurred: “People are sold on the convenience of cordless voice communication, so any future solution [for home communication] has to incorporate that.”
“The category is still large and growing, though at a decelerated rate,” said Peter Arato, senior telecom analyst at NPD Intelect. “The moves by Sony and Casio are not indicative of category health.”
Recent numbers from NPD Intelect are encouraging for retailers and suppliers alike, he said. The higher priced 2.4GHz cordless phones, for example, are gaining market momentum. And the cordless phone market, with about an 80 percent household penetrate rate, still has a lot of upside.
“Roughly a fifth of the population doesn’t have a cordless phone, and you can derive additional growth from people who have yet to buy and those that want to upgrade,” said Arato.
Several manufacturers, however, painted a picture of scorched-earth retail price wars and a high return rate taking a toll on margins, but they still said they believe the market will endure well into the future despite the emergence of home-networking technologies.
“Price erosion has had a very adverse effect on the profitability in this industry, as have returns,” said John McNenney, Panasonic’s assistant telecom GM. “Phones have the highest rate of return of any CE category, and that’s an enormous profit drainer,” he said. “I would suspect returns had a hand in Sony’s decision.”
McNenney claimed that liberal retail return policies contribute to this high return rate, as do inflated consumer expectations ballooned by manufacturer hype and the self-service price shopping that leads consumers to lower end models.
“The return climate does seem to be shifting because it’s an incredible drain on retail profits as well. We hope they [retailers] will correct it, and that will relieve some of the expense of doing business in this market,” said McNenney.
Toshiba’s Balinsky concurred that price erosion has made everyone in the industry squeamish. “2.4GHz came out two years ago, and the prices on some phones have been gutted to the point where I’ve seen 2.4GHz advertised for $29. That’s really tough,” lamented Balinsky. The average price of a 2.4GHz phone (analog and digital) is $119.
“Retailers and manufacturers share the responsibility for this, but some manufacturers in particular drove down prices in a hurry for market share” without care or consideration for the long-term market impact, said Balinksy.
“It’s a healthy market, but it’s still very difficult to make any money,” said Bruce Garfield, president of VTech, whose company will lose a major OEM client in Sony. “Margins are being squeezed, and it’s hard to make enough margin to cover all parts of the business that you have to cover,” he said. Garfield indicated that VTech will continue to market phones under the Vtech and AT&T brands.
“Margins have not been where I’d like to see them, but the market is still fairly strong, and it’s a growth category in our stores,” said Child of R.C. Willey.
These price wars need not be so devastating, asserted Levy. “Most people shopping for cordless phones already have one, so when they’re out shopping, they’re looking for performance and features [above what they have] and not by price.”
Levy said his company has fought price erosion by playing strictly in the higher priced 2.4GHz DSS field, keeping prices stable but increasing feature sets on phones at comparable prices year after year.
“The industry has to choose what it’s going to sell,” said Levy. “Buyer remorse tends to be higher because we’re second-guessing consumers and giving them a lower priced product that they won’t be happy with.”
Manufacturers expressed hope in moving in and gobbling up the sizable shares left vacant by Sony’s departure, while retailers are looking to expand their offerings from competing suppliers.
“We’re investigating other options in expanding our phone lines with other suppliers,” said a Good Guys spokesperson.
“We’re going to need to fill that void, and it has to be a supplier with a name,” said Child.
Market, Prices Shrink For Cordless Phones