On the Comeback Trail:
The U.S., for years an also-ran in the consumer-electronics industry,
may be poised for a resurgence
By Scott Thurm
06/15/98
The Wall Street Journal
Page R19
(Copyright (c) 1998, Dow Jones & Company, Inc.)
Richard Elkus Jr. helped invent the videocassette recorder in 1970 at Ampex Corp. in Redwood City, Calif. A few years later, Mr. Elkus watched in dismay as Ampex abandoned consumer VCRs to concentrate on professional tape systems that sold for hundreds of thousands of dollars.
That story was repeated often in the 1970s and 1980s, as U.S. companies were driven -- or walked away -- from markets for consumer-electronics products that were taken over by rivals from Japan and other countries. And having seized control of the products themselves, these rivals went on to master the technology inside them as well.
Now, Mr. Elkus sees an opening for U.S. resurgence in the field, at least for the short term, as televisions, telephones, cameras and other devices are transformed by the addition of digital technology, turning these products into the equivalent of specialized computers.
"We absolutely have a shot," says Mr. Elkus, now co-chairman of Voyan Technology, a Santa Clara, Calif., maker of factory-control software. "We have an excellent opportunity to be dominant in those fields."
It's likely to be a different sort of dominance, though. It won't be about where products are made. After all, Sony Corp. builds television sets in Pittsburgh, while Silicon Valley's C - Cube Microsystems Inc. makes its chips in Taiwan. The Consumer Electronics Manufacturers Association, which represents both U.S. and foreign companies, estimates that roughly half the $78 billion that Americans spend on these products each year comes from products manufactured or assembled in the U.S., and officials don't see that sales mix changing much in the next decade.
But what those figures don't account for is who makes the most important -- and most profitable -- components, and that's where U.S. high-tech companies see a chance to make their mark in the next decade. While the cases of these next-generation machines might still say Panasonic or GoldStar, analysts suggest, the software and semiconductors that represent their brains and guts will be designed and made by U.S. companies.
Take, for example, the popular game players made by Sony and Nintendo Co. Both run on chips designed in Silicon Valley -- by LSI Logic Inc. for the Sony PlayStation and Silicon Graphics Inc. for the Nintendo 64.
Similar alliances will proliferate, at least in the next few years, industry officials and outside analysts say. "The more products need sophisticated interactive capabilities, the more they become like computers," says Todd Thibodeaux, senior economist at the Consumer Electronics Manufacturers Association. "That lends itself to U.S. companies doing better in those markets."
Already, Intel Corp., Rockwell International Corp. and others are scrambling to place their chips in the next generation of "smart" phones. Microsoft Corp. and Sun Microsystems Inc. each want to control the software in the next generation of cable-television set-top boxes. And Lucent Technologies Inc. is building digital-TV networks in China.
Even in display technologies, where Japanese makers of monitors and flat panels have virtually eliminated U.S. competition, American firms are testing innovative approaches to get back into the game. Kopin Corp., of Taunton, Mass., makes a high-resolution screen the size of a nickel that is included in some Motorola phones. And Texas Instruments Inc.'s digital light-processing products squeeze 500,000 tiny mirrors on a single chip to project images. For now, digital light processing is primarily a business tool, but it's available for home-theater systems, and company officials are pitching it for the next generation of digital televisions.
High-definition digital TV was supposed to be the U.S.'s re-entry card to consumer electronics. That's a big reason why the federal government is requiring broadcasters to begin digital transmissions in major markets this fall.
The best-known benefit of digital technology -- a big leap in image quality -- requires new TV sets that will start at $6,000 or more. So no one expects big consumer sales of those sets right away.
But U.S. companies are racing to deliver other benefits of computerization through souped-up set-top boxes, at $300 or so, which may provide everything from satellite TV to music, Internet access and telephone calls. And the market for set-top boxes is one of the few in consumer electronics still dominated by U.S. companies.
Indeed, some champions of U.S. technology believe that digitization broadly rewrites market rules that for two decades favored Asian manufacturers. Sony, for example, has used mastery of manufacturing techniques to keep its Trinitron TVs a gold standard in the market many years after their introduction.
"In the transition from analog to digital video, much of the black magic that made Sony the epitome of consumer electronics is gone," says Alexandre Balkanski, chief executive officer of C - Cube , a Milpitas, Calif., company whose digital video chips are in more than two-thirds of the 15 million videoCD players sold in China last year.
Mr. Balkanski thinks Japanese consumer-electronics giants such as Sony and Matsushita Electric Industrial Co. are vulnerable to combinations of sophisticated chips and software in the same way that International Business Machines Corp. lost its hegemony over computers to Intel and Microsoft. As the most sophisticated and valuable pieces of the new consumer devices, he says, the chips and software will reap higher profit margins than the appliances themselves.
Consider the videoCD, a sort of poor man's digital-videodisk player. The units sell for about $120, but Mr. Balkanski says manufacturers produce them for about $75. C - Cube 's video compression chip, which costs about $12, is the single most expensive component in the box. That's a smaller share of the value than Intel's Pentium commands inside a PC, but Mr. Balkanski says C - Cube can increase that share over time by integrating more functions onto its chip, while the cost of the player declines.
Indeed, low cost, small size and low power consumption are paramount features in the new battleground, and U.S. companies excel in all three categories. "Small wins, and battery life wins," says Bryan Lewis, a principal analyst for Dataquest Inc., a San Jose, Calif., market-research firm. "So you end up trying to put as much of the system as you can on a chip."
However, some other observers think that over the long term, providing components alone will keep U.S. companies in the back seat to Asian manufacturers. "I've been waiting for someone to come up with an example of a Silicon Valley company that's a good consumer-products manufacturer, and I haven't seen one," says Michael Borrus, a University of California at Berkeley economist who has studied Silicon Valley's role in trade.
Moreover, despite heightened concern among U.S. companies about better guarding their technologies this time around, there is no assurance that Asian companies won't be able to successfully imitate U.S. innovations in components and produce their own breakthroughs, as they have in certain fields such as memory chips. Indeed, if the pace of innovation slows over time, U.S. companies could see their advantage erode, without the manufacturing business to fall back on.
"Which way across the Pacific knowledge will flow, and ultimately dollars will flow, is a really interesting question, more interesting than it has been in a while," says Timothy Bresnahan, a Stanford University economist.
Even the optimistic Mr. Elkus agrees that for U.S. companies to succeed in the long run, they will have to make more of the devices themselves, and not just their innards. That would bring U.S. companies back to the same conundrum that Ampex faced in 1972: Do they try to reach large markets, with products that offer very small profit margins? Or do they seek bigger profits on smaller volumes by constantly adding new features?
Ultimately, it's not just their choices that will determine who takes the lead in the consumer-electronics market. "Who knows what people are going to value in computer-like home entertainment?" asks Mr. Bresnahan. "Will they value more computer-like stuff or entertainment-like stuff? It's a race between two competing visions."
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Mr. Thurm is a staff reporter in The Wall Street Journal's San Francisco bureau.
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American Innards
A sampling of products from foreign companies that include chips made
by U.S. companies:
Product/Includes Chips Made By
Sony PlayStation/LSI Logic
Nintendo 64/Silicon Graphics
Nokia cell phone/Intel, Texas Instruments
Ericsson cell phone/Intel, Texas Instruments
Sony cell phone/Advanced Micro Devices
Sony DVD player/LSI Logic
Goldstar DVD player/ C - Cube Microsystems
Casio digital camera/LSI Logic
Canon EOS camera/Motorola
Sony portable CD player /Motorola
Panasonic portable CD player/Motorola
Sony minidisk Walkman/Dallas Semiconductor, Motorola
Source: Company officials
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