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TECHnalysis Research Guest Column

January 10, 2014
Commentary: Hardware companies try to reinvent themselves

LAS VEGAS -- Coming off yet another CES show, I'm always struck by how vibrant the technology hardware business still is.

Battling the masses in the jam-packed aisles of the Las Vegas Convention Center or navigating the maze of nearby hotel ballrooms here, it's always the hardware and gadgets that are the focus of everyone's interest and conversations. While this may be somewhat self-evident, there are many good reasons why it might not always be the case.

First, it's a generally understood axiom that the profit margins in the technology hardware business are asymptotically approaching zero for most companies who sell finished products.

Arguably this phenomenon started with PCs, but it quickly moved to TVs, tablets and, now, smartphones. Witness the recent profit decline and concerns around Samsung Electronics, the world's largest supplier of mobile phones and other electronic gadgets. Many hardware-focused tech companies find themselves in relatively challenging financial situations, particularly with the hardware portion of their business.

Second, much of the professional investment community, including venture funds and the tech press, have written off hardware as dead. With virtually all the funding and press attention directed toward Internet-based services and other software solutions, hardware-focused entities have had a tougher time getting the funding and attention they need.

To be fair, there are a number of legitimate challenges facing hardware-focused businesses, especially because people's expectations of products have moved way beyond simple functions to devices that offer "solutions" — in other words, they provide complete experiences that people actually want. Many traditional hardware companies don't have these kinds of capabilities in their corporate DNA and, longer term, this represents a serious challenge — particularly for some of the current and emerging Asian corporate powerhouses.

Coming out of CES, however, I saw signs that some of the "old world" tech hardware companies are starting to reinvent themselves into hybrid hardware and software entities. LG Electronics, for example, debuted its first smart TVs with WebOS, leveraging their controversial, but I believe ultimately critical, purchase of the operating system originally built by Palm and then Hewlett Packard.

An even more interesting example came from chip juggernaut Intel.

At the company's slickly produced CES keynote and at a small private dinner with press and analysts, new CEO Brian Krzanich and other top executives laid out a vision -- from simply powering a new range of smart connected devices with their CPUs, modems and other chips to one building complete software and hardware products—some of which won't even have Intel silicon inside them.

Intel did not go to the next step of actually branding products — as their chief competitor Qualcomm has done with their Toq SmartWatch — but the kind of efforts both of these companies are making represent an important and essential step in the evolution of traditional hardware vendors that I believe other companies would be wise to emulate.

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