Looking for the Next Wave in Electronics

For the once seemingly invincible Japanese consumer electronics industry, the past year has been full of unpleasant surprises.

Recession on both sides of the Pacific has sent profits into a free fall. Compact disc players, VCRs and TV sets are still selling, but fierce price competition has sliced margins to the bone. The new-product well isn’t exactly dry, but carefully laid plans for new technologies such as high-definition television and multimedia computers now lie in tatters.

Adding insult to injury, it’s an American computer company--Cupertino-based Apple Computer--that’s poised to steal the headlines at the Consumer Electronics Show in Chicago this week.

Even as N. V. Philips (a Dutch firm) and a raft of Japanese electronics companies such as Sony and Matsushita gear up for a high-stakes battle over two new digital music formats, Apple Chairman John Sculley is serenely asserting that the future of consumer electronics has little to do with cassette tapes and everything to do with computers and communications.

“We’re seeing the birth of a mega-industry,” says Sculley. It will incorporate consumer electronics, computers, communications, entertainment and media, and be worth a mind-boggling $3.5 trillion annually by the next century. Sculley, who will be previewing Apple’s new line of “personal digital assistants” at the show, believes that the emergence of the mega-industry will realign the balance of power in electronics.

Even those with a less grandiose vision than Sculley agree that the electronics landscape is changing. The dramatic increase in the power of the microprocessor, the decline in the price of computer memory, advances in handwriting and voice recognition, and major improvements in video compression and wireless communications are giving birth to a new breed of electronics devices that combine the convenience of a Walkman with the power of a personal computer.

Analysts say the changes should give American companies a chance to regain some ground lost to their Japanese counterparts. Many of the new products require not only the ability to churn out complex but highly standardized products at low cost--long the linchpin of Japanese dominance in consumer electronics--but also sophisticated software and systems design capabilities, which American firms possess in abundance.

Apple’s Newton, a pocket-sized machine that will serve as a pen-controlled fax machine and personal organizer, is just one example of things to come. The Newton will be smart enough to recognize simple commands written on the screen, then carry them out, so one would need only write “fax the office” to send a note to a colleague.

Apple is expected to show the product publicly for the first time at the CES show, and the company has formed a new division--personal interactive electronics, or Apple PIE--that will bring the Newton and other products to market beginning next year.

Apple isn’t the only American company that hopes to gain a major chunk of this emerging market. Palo Alto-based Hewlett-Packard has had great success with the H-P 95, a hand-held personal computer that runs the popular Lotus 1-2-3 spreadsheet program.

The company has also agreed to build a specialized consumer computer for a new “interactive” television service called TV Answer. Bob Frankenberg, general manager of H-P’s personal information products division, refers to the new devices as “information appliances.”

Microsoft Corp., the Redmond, Wash.-based personal computer software giant, is another likely player in this new game. “We now have the ability to represent all media types (words, pictures and moving images) in a digital way,” says Rob Glaser, head of Microsoft’s multimedia efforts. “We want to extend our technology to new types of products.”

Yet the fact that there are new opportunities for American companies hardly means that the Japanese powerhouses will fade away. To begin with, both Apple and Microsoft are pursuing their strategies in partnership with Japanese firms.

Sharp will be manufacturing the Newton for Apple. Microsoft has already built some special software for a Sony “electronic book” player, and sources say a Microsoft engineering team is also working with Matsushita on special-purpose, hand-held computers.

Moreover, many Japanese companies have good technology of their own. The Sharp Wizard and the Casio Boss were really the first “personal digital assistants,” and Sony views Apple’s new thinking as confirmation of its own view of the future of consumer electronics.

“We’re happy to see an important U.S. computer maker saying what we’ve been saying for a long time,” says Ron Sommer, president of Sony Corp. of America. He says industry boundaries are blurring to the point where “we’ll be talking about IBM and AT&T; and Sony in the same context.”

Analysts are uncertain whether recent financial problems will dull the competitive edge of the Japanese firms. Nearly all of the electronics powerhouses--Matsushita, Toshiba, Hitachi, Fujitsu, NEC, Sharp--have reported dramatic profit declines recently even as sales have risen, and Sony last week reported its first-ever operating loss.

In response, most of the Japanese companies have cut R&D; and capital expenditures--an unusual measure for Japanese firms even in hard times--and that could eventually make it tougher for them to compete in the emerging information appliance market.

Yet in many respects, it’s business as usual in consumer electronics. In Chicago, newcomers such as Apple are eyeing the future, but the established players have a more pressing matter to worry about: the battle between two new music formats, Philips’ Digital Compact Cassette and Sony’s Mini Disc.

The DCC/Mini Disc face-off provides a good illustration of how consumer electronics has traditionally functioned. Both camps are trying to rally support among manufacturers and record companies in advance of launching the products, since only broad support can assure the high volumes needed to bring prices within range of most consumers. And the battle is a long-term one: It’s likely to be five years before either format is firmly established.

Like the compact disc, both DCC and Mini Disc use digital technology to provide much clearer sound than is possible with traditional cassette tapes or records, though neither sound quite as good as CDs. The DCC machines will be able to play standard cassettes and digital tapes, and the Mini Disc eliminates the skipping problem that plagues portable CDs. Unlike the CD, the Mini Disc can also record music.

DCC, first announced in 1990, appeared to have the early edge in the race. Philips gained early support from Matsushita, Sony’s archrival, and Tandy Corp., and all six major record companies have agreed to back the format. DCC was supposed to be introduced this spring, well in advance of Mini Disc.

But the DCC rollout is now scheduled for fall, and Mini Disc appears on target for its November debut. In Chicago, Sony will demonstrate MD’s recording capabilities publicly for the first time, and will announce support from Aiwa, Denon, Sanyo, Alpine and other manufacturers. Among the big six record companies, only Sony Music and EMI have agreed to back Mini Disc thus far, but Sommer of Sony says he’s confident of gaining further record company support.

Paul Gluckman, managing editor of Audio Week, notes that the Mini Disc will take a lot of selling because it’s a revolutionary new format, while the DCC was an evolutionary change from the cassette tape. But he said it’s too early to tell whether there’s room in the market for one or both of them.

The first DCC machines from Philips, designed for home use, will cost $800. Sony, which is positioning the Mini Disc as a portable device, a replacement for the Walkman, is expected to set a price of $500 to $600. The price will eventually drop to $200 to $300 if the formats take off.

And therein lies another lesson for would-be American entrants into consumer electronics: Japanese companies have learned that consumer devices cannot gain a true mass following until they cost well under $500. The Apple Newton, the H-P 95 and other nifty new information appliances might be considered consumer electronics products, but they’re expensive enough--and their potential uses narrow enough--that they’ll appeal primarily to business costumers for the foreseeable future. From a marketing point of view, they’re really more like cellular phones than cassette tape players.

Thus Apple, H-P, Microsoft and others might be well positioned for John Sculley’s new “mega-industry,” but Japanese manufacturers will still get most of the shelf space at the local Circuit City or Good Guys. And sales of audio and video gear will continue to provide a solid base for Sony, Matsushita and the rest to compete effectively in nearly every corner of the brave new electronics world.