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Consumer Electronics Industry Needs a Jolt

The focus has shifted from R&D to reactionary, iterative products


What happened to R&D?

Every business walks a fine line between innovating and moving with the market. While R&D has driven innovation and product progression in the past, there has always been an element of watching what the other guy is doing. (And if the other guy is doing it better, following his lead.)

We’ve seen that strategy in the automobile industry, for example, when American automakers scoffed at Japanese front wheel drive vehicles for decades. That all changed when U.S. automakers recognized the fuel saving advantages (and growing Japanese penetration into the U.S. market) and piled on that bandwagon in the 1980s.

A similar force is at play in the consumer electronics industry today. Consumer tech companies must be able to shift directions in a matter of months if they don’t want to be left behind.

This has led to a period where the entire industry seems to have let R&D slide in favor of other tactics:

  • Releasing iterative products and a stream of relatively minor product updates. Most recently: Samsung’s (PINK:SSNLF) recently unveiled Galaxy S4 smartphone.
  • Fighting for consumers in court instead of on store shelves, attempting to litigate each other into oblivion and halt the sale of competing products, country by country.
  • Glomming onto each other’s successes, to the point where every rumored product is countered by a competitor’s reports of a better version.
  • Shifting R&D budgets to litigation, marketing and patent acquisition. Apple (NASDAQ:AAPL) now budgets just 2.2% of revenue on R&D, putting it near the bottom of the pack on that basis.

Examples of this pack mentality are endless. Take the smartwatch. Versions of this product have been around for decades, but it wasn’t until last year that they really hit they spotlight. The Pebble smartwatch set a Kickstarter record within a week of its funding campaign (securing 33 times its goal in that time). The Pebble and other smartwatches from a range of small companies were big news at 2013’s Consumer Electronics Show.

Meanwhile, in 2012, Apple nixed its square iPod Nano with the watch face (a gadget that had spawned a whole industry around customized watch bands that took the Nano one extra step), in a move that signaled its own interest in producing a smartwatch.

Last month, a report surfaced that Apple had a team of 100 designers working on an iWatch. Right on schedule, rival Samsung announced that it would counter Apple with its own smartwatch. In Bloomberg, a Samsung EVP is quoted as saying, “We’ve been preparing the watch product for so long.” Subtext: Apple is copying us.

Expect dozens of smartwatches to hit the market in rapid succession, confusing consumers and obliterating the smaller innovators that started the trend. Then watch for the products, differentiated by nothing more than color and case material, and the inevitable slew of infringement lawsuits.

The list goes on:

  • Last year, Apple released a fourth-generation iPad that was identical to the one it had released only seven months earlier, but with a slightly faster CPU.
  • CES 2013, where smartphone manufacturers raced each other to release copycat versions of Samsung’s Galaxy Note and its 5.3-inch display.
  • BlackBerry’s (NASDAQ:BBRY) ill-fated PlayBook was rushed to market in 2011 in response to the popularity of the iPad. The PlayBook bombed, costing the company a fortune in unsold inventory.
  • A rise in cloud computing, thanks to corporate IT cutbacks and web startups like Pinterest that didn’t have cash for their own infrastructure.
  • The “retina display” race, launched by Apple’s iPhone 4.

As a consumer, I don’t have an issue with a company continually improving its product. I appreciate the fact that they are able to build on success.

But I’m concerned that the current situation in the consumer electronics industry has stalled innovation. The killer new products I’ve been hoping for haven’t materialized, probably because research has been all but replaced by reactionary development.

The really interesting new stuff these days is coming from Kickstarter campaigns — and a search engine company turned hardware dabbler, Google (NASDAQ:GOOG). With the current overall climate, startups are in danger of being crushed by a tech giant that senses opportunity and rushes a version of their product to market.

My current disappointment isn’t just coming from a consumer perspective, either. The investment community is affected as well.

Startups that get crushed before they can go public are an opportunity lost; a company like Apple can’t put together the kind of massive growth that it did over the past decade without investing in R&D, releasing innovative new products and inventing new product categories.

And there’s always that risk that a seemingly solid consumer tech company that gets complacent with the rhythm of releasing incremental product updates will miss the threat that comes out of left field and crushes it (a la BlackBerry).

Competition is good and innovation is good — for consumers, the long-term health of a consumer technology company and for investors. Let’s hope that the pendulum begins to swing in the other direction soon, prioritizing R&D over “me too” product development, and lawsuits.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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