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The Broken Leg of the Stool
Consumer technology is a three legged stool.
The first leg is the personal computer where much of the original innovation in consumer technology happened. Today, the personal computer business is fairly mature dominated by Microsoft on the software side and Intel on the hardware side. Apple remains a formidable player and provides an alternative to Microsoft which both encourages innovation and gives consumers a choice. But even with the fairly mature nature of the personal computer sector, innovation is possible because the personal computer is by definition an open platform where consumers have the power to configure their device however they choose. The recent peer to peer file sharing (Kazaa/Grokster/etc) and voice over IP (Skype) revolutions are good examples of the fact that innovation is alive and well in the personal computer sector.
The second leg is the Internet, a veritable wild west of innovation. Consumers reign supreme on the web and anyone can launch a new web service whenever they want. The mid 90s ambitions of Microsoft to take a toll on every web transaction are laughable in hindsight and showcase the power of the ultimate open platform to keep things honest and keep the consumer in control. Venture capitalists have been criticized for focusing so much of their recent investment in web services, but the reality is that there is nowhere in the technology business where the pace of innovation and the ability to compete is as high as the Internet.
The third leg is consumer electronics, an industry that is much older than the other two. I do not have data on the size of the three sectors but if I had to guess, I'd bet that consumer electronics is the largest of the three sectors as it includes cell phones, game consoles, and portable music players, three of the most important and popular consumer techology devices.
But this third leg is broken, even though it remains a vital and growing sector. It's broken because its nearly impossible for the consumer to take control of their consumer electronics experience and it's broken because its almost impossible for an entrepreneur to innovate in this sector.
I have a love/hate with all of my consumer electronics devices.
I love my iPod for its functionality but I hate it because the hard disk crashes, the battery dies, and I can't get in there and fix/replace them. I hate it because the software is closed and I am stuck with Apple's god awful DRM system. I hate it so much that I have thought often of how I could replace it. But I can't. And that sucks.
I love my Treo 650 for its functionality but I hate it because it's camera sucks, because it crashes on me all the time, because the software is counter intuitive, and because it costs over $600 if you buy it unsubsidized by a carrier.
I love my Canon SD550 camera because it is small, light, easy to use, and takes wonderful pictures in the light. But I hate it because the videos it takes are huge files. I hate it because I can't upload the pictures to Flickr directly from the camera like I can with my Treo. And I hate it because when they come up with a 9mp chip, I can't simply swap out the chips, I have to get a whole new camera.
The fact is the consumer electronics industry is not consumer centric. In fact, it makes an art out of being consumer unfriendly. It's MO is all about locking consumers in, not opening things up. The carriers and cable operators make things even worse when telephony and/or television come into play. They lock you down even more with subsidies, proprietary products, and high price points.
Something has to be done about this. Entrepreneurs and VCs need to be able to play in the consumer electronics space. To date the venture capital industry has had pretty awful results in consumer electronics. There have been some successes, like Danger in the smart phone business. RIM is another example of a company where entrepreneurship succeeded in consumer electronics. But in reality, the venture industry is a trash heap of failed consumer electronics startups. And with VCs being wary of consumer electronics, entrepreneurs find it very hard to drum up the money to do interesting new things in this sector.
I am not writing this to propose any solutions. I have some ideas, but they are unformed and not ready for public consumption. I am writing this as a call to action. We need to take the principals behind the personal computer revolution and the world wide web to consumer electronics. To make devices that are truly by the people for the people. They certainly aren't that today.
December 20, 2005 in Venture Capital and Technology | Permalink
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» Wheres The API For My iPod? from The Consumer Electronics Stock Blog
Venture Capitalist Fred Wilson says its high time the consumer electronics industry joins PCs and the internet in become flexible vis-a-vis consumers and entrepreneurs:
the consumer electronics industry is not consumer centric. In fact, it ma... [Read More]
Tracked on Dec 21, 2005 10:33:08 AM
» ON TABLET PCs AND CONSUMER ELECTRONICS from *michael parekh on IT*
OPEN UP ALREADY There's been a fair bit of discussion around Tablet PCs over the last few days on memeorandum, capped by today's article titled A Brief History of Tablet PCs by Conrad Blickenstorfer. Looking back over the last fifteen years or so, the ... [Read More]
Tracked on Dec 21, 2005 1:02:53 PM
» ON TABLET PCs AND CONSUMER ELECTRONICS from *michael parekh on IT*
OPEN UP ALREADY There's been a fair bit of discussion around Tablet PCs over the last few days on memeorandum, capped by today's article titled A Brief History of Tablet PCs by Conrad Blickenstorfer. Looking back over the last fifteen years or so, the ... [Read More]
Tracked on Dec 21, 2005 2:03:03 PM
» The Consumer Electronics Industry is Broken from Startup Fever
Fred Wilson likens consumer technology to a three legged stool. The first leg is PCs. The second is the Internet. And the third?
The third leg is consumer electronics, an industry that is much older than the other two. I do not have data on the size ... [Read More]
Tracked on Dec 21, 2005 8:21:01 PM
Comments
Could it be that previous failures were because of the time frame that VCs expect to get a ROI and their business model doesn't support the massive investment it takes to get consumers aware of and comfortable with new products?
Posted by: brian | Dec 20, 2005 6:28:18 PM
Interesting post. I'd agree consumer electronics is the third leg of the stool. However, I don't think its broken....it just hasn't matured to the extent of the other two 'legs'.
Remember, prior to Intel, IBM, & MS opening things up, computers from different vendors had a hard time communicating with one another. Consumer electronics will follow suit. It's a matter of time - and things are begining to happen.
Will venture-backed firms succeed in this arena? Difficult to say. Distribution & branding play critical roles....and both are capital-intensive to build and maintain. If VC's choose to play in this arena, they'll need to bring a longer-term view.
Posted by: billg | Dec 20, 2005 7:58:45 PM
Maybe we need Linux on more personal electronics... Maybe we need to open source hardware, and make everything modular. Technicians, similar to auto mechanics, could put together a nice packages for their customers.
I know the treo is modular, you can swap the GSM radio for CDMA with a software upgrade. I bet the camera from the new 700 will work on the 650 with the right software.
I personally will not use anything that limits my choices, so I hacked my treo to get ipod functionality. The reason of the ipod sucess is because apple has the whole package with itunes and tons of content. If consumers were not so quick to buy the ipod, other music players that are more user freindly would have prevailed.
I think good engineered designs with limited production runs for the high-end market can shape the future. As far as the third leg being broken, I see plenty of happy ipod users with lots of $$$ to spend.
Posted by: NonoBee | Dec 20, 2005 10:44:30 PM
Interesting post.
I was originally a hardware engineer, working mainly on enterprise class computing devices. Being an idea hamster, I've often come up with ideas for consumer electronic devices. I know I'm not alone, but I remember many years before there was a Rio or an iPod, friends and I would discuss the merits of a portable electronic mp3 player, it seemed an 'obvious' development. We never went out to try to build one though.
I left my corporate job to start my own company, but I chose to build a software company rather than a hardware company. While not focused specifically on the internet, I am utilizing it and 'web 2.0' type technologies. I've often thought about the consumer electronics sphere, but I would never start a company in that space. There are two main reasons and they're also why I believe the innovation in this sector lags the others.
First, it's limited because it's hardware. I've argued many times on my blog that startup ideas need to be malleable to increase the likelihood of success. Once something is committed to hardware you're 'stuck with it' until the next hardware iteration. If the idea is flawed, even in minor ways, you must deal with all of the headaches and cost of running through your existing production run until you can iterate the design. All of the ways of testing your designs require even more capital, focus groups, marketing research, prototypes etc... You're essentially limited in the dimensions of freedom for developing winning strategies.
Second, there is a huge barrier to entry in terms of starting capital. It's essentially impossible for a 'lay' person to raise enough capital to spend the development time (both hardware and software) to create a compelling consumer device. Why? To get capital, you have to appease funders who are looking for something 'real', something that has demonstrable value, and most preferably, something that's already producing revenue of some sort. Regardless what the media likes to tell us, most sources of capital (especially VC's) do *not* want to fund two guys in a garage with an idea. So unless you are a super-serial entrepreneur, have very deep personal pockets or a very rich Uncle Earl, consumer electronics, or any hardware venture for that matter, is essentially off limits.
This leaves the development in the hardware and CE space to big companies who are interested in lock in and user unfriendliness (like you pointed out) to increase the return on their hardware investment rather than any kind of fundamental innovation. Geez look at Sony and their tireless adherence to proprietary formats. Minidisc anyone?
The situation sucks, I still have plenty of ideas for neat consumer electronics type devices, I'm sure I'm not alone, but I also know the barriers to a consumer electronics startup based are far too high.
Once I've made my initial millions off my first company, maybe I'll come back to my hardware roots.
Posted by: mikepk | Dec 20, 2005 10:46:01 PM
It should just work.
Posted by: charlie crystle | Dec 21, 2005 12:15:57 AM
Without the last couple of years of internet history, we might not even notice how backwards consumer electronics are. I love and use Canon cameras allot. But the software that they give you is not worth the CDROM that it's copied on. Their SDK is ridcolous. It should be Canon's job to make amazing hardware like they do. Document the OS and API and leave the rest to the people. They will make it better than anything that Canon could have ever come up with.
Or maybe Nikon gets tired of being 2nd and they use the next big thing to become #1 again.
Peoples attention and curiosity is the most precious resource. It is expensive to buy but easy to get as a gift.
Posted by: Andreas Wacker | Dec 21, 2005 5:12:32 AM
To me, this is a reflection of the sickness of the VC industry not a sickness in CE. I am constantly reading all this *whining* in the press, of VCs claiming there is too much money chasing too few good deals.
Yeah right.
There was an interesting article in the New York Times the other day about the fact that movies have all become homogenized. That there is no more risk taking in movies. They are all "safe". They are mainly perfectly produced little turds.
This is true in the VC industry. Kleiner Perkins used to be a great VC firm. I am sure they still make a lot of money, but today, would they do something as bold as "Go Corporation". Go was risky, and visionary. But at the end of the day it lost money. Most companies do. But John Doerr had a desire to do big, great things. Would he or KP make that kind of big bet today?
Personally, I love CE and have serveral ideas in the area, but I dont think any VC would fund them for the reasons stated by a previous commenter.
I think the industry has gotten fat and comfortable, and incredibly risk averse. You rightly point out how this huge important area is unfunded. The kinds of uncreative things that I see that do get funding suggests to me that todays VCs have no moxie and no vision - just lots of money.
Posted by: Hank Williams | Dec 21, 2005 5:57:21 AM
It's not the focus of the article, but that problem with large video files is why I went with the Casio EZ 750. All of the photo quality of the Canons, but cheaper, with better menus, and markedly better battery life, in addition to using MPEG4 for the video (30 minutes on a 1GB SD card).
I completely agree with everything you've said here. My wife uses the Ipod now, that I only have because I won it. I wouldn't dare expend that much cash on something with obvious flaws (no matter how beautiful it is).
The Treo 650 went back to Cingular some time back for the same reasons mentioned: too costly, it crashed like crazy (and didn't always turn the phone portion back on when it rebooted!), and you could barely hear a caller unless you paid for a special app to boost the volume!
I currently use the Sidekick 2, despite two major concerns:
1. I am 29 (today!), and not a teenager, so I definitely get some looks
2. It is a closed platform
When I look beyond those issues, I see a very well integrated, stable platform, with usability as a primary design goal. I may not be able to download and install my own applications (other than those "signed" by Tmobile), but the ones included and/or purchased work pretty flawlessly.
Posted by: Richard Goodwin | Dec 21, 2005 10:12:38 AM
most consumer electronics devices are single-function or at least few-function. as such, the prices that people are willing to pay for them are quite a bit lower than a general purpose device like a computer.
so, to get under the willingness-to-pay hurdle for cool gadget X, you've got to get the kinds of economies of scale that come with tightly coupled, proprietary, closed designs.
you could have an iPod with a replaceable battery or a camera with an upgradeable CCD, but they would cost a lot more, be larger, and be less reliable.
what your post seems to ignore is that consumer electronics people actually are trying to satisfy a huge number of constraints within pretty low pricepoints, and they generally do that pretty well in my opinion...
Posted by: just.a.guy | Dec 21, 2005 10:40:36 AM
I read this piece reminded me of Edward Teller's quotation in John Perry Barlow's piece on open source intelligence (a concept I personally find rather silly, but that's rather beside the point here):
"After World War II we were ahead of the Soviets in nuclear technology and about even with them in electronics. We maintained a closed system for nuclear design while designing electronics in the open. Their systems were closed in both regards. After 40 years, we are at parity in nuclear science, whereas, thanks to our open system in the study of electronics, we are decades ahead of the Russians."
Consumer electronics isn't quite in the same place -- vendors get to use the best components from the rest of the rest of the software world if they wish to. Vendors are bound by paranoia and market realities.
For example, look at Danger. They want to create a platform. The paranoia is that most carriers' networks are insecure, so carriers are loathe to leat arbitarary code run on their network. The market reality is that carriers don't think they get anything by letting arbitrary code run on their network either -- only by being able to charge more.
I doubt we'll see change in this kind of behavior in the phone business until two things happen simultaneously:
1. someone (other than the carrier) releases a killer app for a mobile phone
2. the model of phone it runs on is cheap enough that people will switch phones (and carriers) just to get that app
When carriers start seeing users switching carriers just to get access to an app a different carrier has but didn't build then carriers will want to start opening up their networks. Until then, it isn't worth it to them.
Beyond that, don't underestimate the (slow) momentum of carriers. Mobile phones operating systems were pathetic until Microsoft made WinCE attractive. Sprint is offering flat rate pictures and cleaning up, and it took eons for the other carriers to respond (I think this is a case of bad framing: most carriers figured people would pay $.50 to send a picture. Sprint figured people would pay $15/mo to be able to send as many pictures as they wanted. Sprint was right, even though in practice people send far fewer than 30 pictures per month).
I wonder how much this affects other businesses. Is Apple keeping the iPod closed because they're just control freaks, or are they worried about the DRM being cracked, or the user experience? This last point is not small: making open platforms is expensive and hard. Does the math make it worth it for vendors?
Posted by: Faisal N. Jawdat | Dec 21, 2005 11:16:38 PM
First of all, innovation is alive and well in CE. These devices you mention as the center of the CE universe -- music players, cell phones, and today's powerful game consoles that put PCs to shame -- didn't even exist three years ago. One point I'd agree with you on is that VCs probably can't play in this space anymore, but thats because the CE companies have enough money and don't need the VCs.
Also, why only three legs? What about bio-life sciences? What about energy research? What about ecosystems research? How about nanotechnology, space exploration, geosciences, ... I'm sure there's many more areas deserving of VC investment that I haven't mentioned.
Think outside the envelope, outside the box, and you'll do fine. All of a sudden there'll be the reverse situation where VCs will value each investment dollar as $10 :) That's the way it *should* be, right? Because the potential returns are high, so input dollars should be very expensive.
Posted by: Jacob Levy | Dec 22, 2005 12:11:26 AM
"Open Source Firmware"
Why do consumer electronics companies want to be in the software business? Why do they outsource their firmware, driver and application development and then make such a pig's ear of supporting it and providing updates? Why does each one have to re-invent the wheel: Do we really need every Mp3 player manufacturer to produce a competitor to iTunes and Winamp? Why are people like Broadcom forced into a situation where in order to get FCC approval they have to lock down the hardware API? Why do Sony with the PSP and MS with the XBox have to build in hardware DRM supported by closed source and deliberately crippled firmware? Why does Apple have to deliberately cripple the iPod in order to reach a deal with the media companies to be able to create iTMS?
Open Source Firmware is an idea who's time has come.
Posted by: Julian Bond | Dec 22, 2005 4:15:48 AM
I agree with justAGuy that many of these devices are pushing the edges of what they can accomplish in terms of price/performance, so modularity adds a cost they don't think the market values.
And leading edge techie types tend to re-inforce this, wanting the coolest new features that run the fastest.
(Personally, I use an overpriced and discontinued Zaurus because it runs an open OS, which let me do things like transfer files vs FTP and install a wiki...)
Maybe VoIP-over-Wifi will offer enough of an existing Open infrastructure that someone will do something interesting on it. Of course, as long as your main cellphone doesn't support it, and you can't just pick your own phone to run over a TelCo service, you'll have to carry 2 phones...
Posted by: Bill Seitz | Dec 22, 2005 10:08:50 AM
I agree with the three-legged stool analogy, and supporting analysis. I can imagine one scenario for changing the status quo. A major consumer electronics player that is an also-ran in the marketplace has a "conversion experience". They "pledge", and begin to practice, "non-evil", consumer-centric practices. Like replaceable parts, reasonable costs for spare parts (batteries), platform open-ness. So that, through their good reputation, they achieve brand loyalty, like a very few, elite players (Sony, Apple) now have.
Not sure who the candidates would be. I think it is important that they be a major, full-service player. They don't necessarily have to be the best innovator--they just have to avoid the "how can we lock-in and screw the consumer" mindset. Maybe Panasonic (Matsushita)?
Posted by: Erik Neu | Dec 22, 2005 10:15:40 AM
Surely the problem with CE is not lack of maturity (as someone suggested above) but excessive maturity.
Right now CE devices are extremely complex, non-modular things. In order to recoup the investment needed to create them, you need to sell many devices at near commodity price. To succeed there you need to master the logistics, engagement with the retail channels, complex manufacturing or outsourcing etc. To do this, you need to be big. And being big means you need to be *political*. (Eg. follow the line on DRM)
Not even VCs have the kind of money to turn a start-up with a good design into Sony. And probably wouldn't want to.
Posted by: phil jones | Dec 22, 2005 10:34:59 AM
There are some people working on the open-cell-phone idea...
http://webseitz.fluxent.com/wiki/OpenCellPhone
Posted by: Bill Seitz | Dec 22, 2005 11:08:31 AM
Amen.
I want to be able to have open source software to run my sidekick, integrate and manage my calendar, contacts and personal info, etc. T-mobile's web portal is OK, but nothing compared to what an open source phone would look like.
Good luck - I hope you can make this idea happen.
- Mike
Posted by: Michael Weiksner | Dec 23, 2005 9:40:36 PM
Great article. Good analogy with the stool. Good luck.
Posted by: CellphoneSavant | Oct 9, 2006 1:34:21 PM
