Thank you for taking the time to meet with me today.
Philips has a long history of successful innovation resulting in revolutionary consumer products: Compact Audio Cassette, Compact Disc, and even Senseo coffee makers to name a few. How do you foster innovation at Philips and which companies do you look to as the model for innovation?
If you look at Philips’ long history, you’ll see that the company was conceived and actually began to evolve, centered on technology. And some of these innovations come very much out of technology: the compact audio and compact discs, clearly. Well, if you begin to look more recently, then you begin to see a mix of innovations, which are technology innovations with innovations that are much consumer centric, or consumer-driven innovations, utilizing in some cases a very innovative technology.
You mentioned one example right now -- the Senseo coffee maker, for instance, is an innovation of putting together available technologies and making it easy, simple, friendly and of good quality for the consumers. But there’s nothing revolutionary about the technology the Senseo uses. You can say the proposition is innovative. Also with the Ambilight TV. It’s again putting together available technologies but providing the user with a viewing experience which he enjoys. And this came out of a lot of consumer research, out of our home lab – we have a home lab here in our Innovation Campus where we portray a number of these innovative concepts, and we have people living in that for days and experiencing that and giving us feedback. So I think that over the last few years there has been a lot of effort put in the company to take a user centric innovation approach and to begin to balance the technology strength of the company with the consumer insight.
I think the roots that Philips has in technology innovation still are giving a lot of fruits and branches as a culture within the company.
I also saw a statement from an executive of another big Dutch company that says, “Well, the thing we envy at Philips is that people at 60 years old are still creating. And at our company, people at 45 years old stop to be creative.” I cannot mention this company, but it was an amazing statement. It’s a matter of mindset, culture, environment, atmosphere in the company. And today you begin to see that these creative activities fostered with a user-centric approach in the broader circle of the company, not only in technology circles. And this is an incredible evolution, actually, an incredible development in the company.
But we have not only innovated in, let’s say, in the last couple of years in products or in using consumer insight and technology in combination, but we also innovate in business models. If you look at consumer electronics today, we are the company in the consumer electronics business which is about 10 billion sales. We are operating the company with negative operating capital. We have centered our business in basis of partnerships with suppliers of, for instance, for our products on the industrial side, also with suppliers that design part of our products, and we also have incredible partnerships with key retailers. And innovating continues in the way we deal with that business. So that’s also big innovation that allows us to be profitable in consumer electronics, which is actually makes us an exception. And externally recognized by the analysts to be an exceptional company in a very difficult market where hardly anybody makes money.
Now, which companies we look at? I think we look at different companies depending on the type of innovation that they portray. And it changes over time. We are always very alert for what’s happening and try to learn. A number of years back when consumer electronics was very much product driven the innovations were coming from Sony and Panasonic in Japan. They were bringing innovations in television and so on. Also, look a number of years back at how General Electric innovated in some of their businesses by bringing financial services in house. Now, if you look today in terms of Apple iPod and the way they innovated, for instance, yes they still are making a beautiful product but the proposition to the consumer is a total solution to make digital media, particularly music, very easy to experience and acquire. Every year there is one company that stands out of bringing a certain type of innovation to market. Sometimes solutions related. Sometimes business model driven. Or sometimes, even with the consumer insights. So it’s difficult to have one reference, one company. We look at which companies innovate in which particular area and begin to understand how they did it.
Philips is big. I know that you release hundreds of new consumer electronics products every year. This, on top of your significant presence in medical systems and semiconductors. How do you maintain focus with so much diversity?
The portfolios we have today are only a fraction of what we used to have five or ten years ago. We simplified the portfolio of the company tremendously. Let’s say just ten years ago we were everywhere in all businesses. Today we have five divisions: consumer electronics, Philips semiconductors, medical systems, domestic appliances and lighting. In those product divisions, we have focused or refocused the portfolio tremendously. In consumer electronics three or four years ago, we were in front projectors. We are not in front projectors anymore and focused our efforts on flat televisions at this time.
Looking at consumer electronics, then, you will see that our strengths in consumer electronics is in the home. We are very strong in the home. We do practice in categories in mobile, but we are less of a player there, much more in home. We are not present in digital still cameras, camcorders, and all those categories. And now we say, well home-meets-mobile and mobile-meets-home is a very, very important category. Now, how do we want to do that? Do we grow our mobile business organically or do we do it in partnerships? So these are the kinds of the questions we try to seek.
Besides that, we had a strong business in components. We closed completely the Philips’ component division, so that means that we acquire components and modules from third parties, and some of them just supply our customer relationships and others in partnerships. So the company’s transformed itself and has refocused itself a lot. But it comes from a history of a very large portfolio, indeed.
You mentioned the home entertainment and mobile entertainment are converging and I’ve heard Philips talk about the “connected planet” in the past. How does Philips plan to enable the connected planet where home entertainment, mobile entertainment and data converge and where does your commitment to UPnP (Universal Plug and Play) and the Digital Living Network Alliance (DLNA) fit into this strategy?
Connected planet for us is a vision. That vision is already three years old. We have initiated that vision in some product already – a lot of people have talked about it, and Philips is actually doing it. Of course, the connected planet is a vision that allows us to implement step-by-step. And in that vision, we say consumers want to enjoy any content, anywhere, any time. So that means the so-called connectivity is a very important element of that. And we do recognize that in implementing that vision, we have to integrate the domains of what we call the traditional consumer electronics with what we call the IT or the PC domain and what we call the mobile domain -- that includes the mobile phone, obviously, but not only the mobile phone but also other mobile devices. Also, there is a certain status quo in the home, and different consumers like to acquire and enjoy the content in different ways.
So having recognized connectivity as one of the pillars of our strategy, we have, of course, been very active in establishing enablers for that connectivity. Now you mentioned one of them, UPnP. UPnP for us, is absolutely key. Because of convenience, wireless connectivity is what consumers really like. They don’t like to see wires, so we said, “Well, WiFi is an important element of our strategy,” so we’ve been very active there. And we are one of the eight companies that are in the steering of DLNA. So we actually started that with Intel, Sony, Nokia, Samsung, and Microsoft. And when we started this, we were all looking at each other, competing with each other, but we all said, “Well, in order for us to have business there, we need to create the market” and the creation of the market implies a very strong interoperability between these segments. So you will see in DLNA that you have a consumer electronics company on the steering board, you have IT companies or PC, Dell, Microsoft, and you have mobile with Nokia and Samsung – where Samsung is both mobile and consumer electronics. So it’s absolutely key for us to continue to establish this interoperable environment.
You see now that the next stage is, “Okay, can we get an interoperable environment also for digital rights management?” You know, we have acquired a company, Intertrust, together with Sony, and we have also established what we call the Coral forum. Which includes stuidos plus consumer electronics companies and others such as IT companies. And in that forum, the Coral proposes an interoperable DRM environment, not only on devices but also services. So that Coral environment is like you saying, “Ah, okay. I want to buy the song. I don’t care about what equipment I have. I don’t care from which service I acquire. I want to have the content.” Coral creates that environment. So we are not only believing, we’re not only participating, but we are absolutely in the lead on some of these initiatives.
But Microsoft and Apple are not yet part of this forum, right?
Right, neither Microsoft nor Apple are part of the Coral yet, But Steve Ballmer recognized publicly the value also of having an interoperable environment. We believe that interoperability should be across different propositions, different DRMs. So I think it will only be a matter of time before DRMs like Apple and Microsoft will engage because this is in the very beginning. The majority of consumers don’t even know what DRM is actually – they haven’t experienced it very much.
Until they actually try to copy their music.
Right, copy the music. So your question is actually very interesting. Are we able to bridge this interoperable environment across these different DRM systems? I think it’s a matter of maturity. In any market development you see that when the market is immature on a certain segment, on a certain category, then you see a multiplication of players trying to get proprietary. As the market matures and evolves, it is natural that you come into more interoperable and more common environments. So I guess that this will evolve like that. A bit of a prophecy here.
As long as we’re talking about Apple and Microsoft, these are relatively new players vying for the living room. It’s clear that your competition is changing. Instead of Sony and Samsung, you are now competing against non-traditional consumer electronics companies. How has this affected your strategy?
Oh, it’s in the very heart of our strategy actually. You’re right – in the past we used to have competition from other CE players. Even in the CE domain it’s changed because we have companies in China that are coming from a very low-end, very low-cost perspective. Then you see companies that come from the IT side, Apple. We see Dell. We see HP was trying CE and so on. Then you also see companies from the mobile space trying to get in. Look at Cisco for example, they are threatening our set-top business via the acquisition of Scientific Atlanta. Why? Because they begin to offer more end-to-end solutions. So, what we need to understand is two things: who are our competitors, and in some cases whether they are real competitors or could they be partners for us to develop a market together. This is the strategic game today. On one side, it doesn’t make our business any easier. On the other side, with enabling technologies such as residential and mobile broadband and the continuation of Moore’s Law you see today that you can have a rather cost effective, simple device with much more processing capabilities. So all these elements put together begin to open for the consumer complete new propositions or better propositions on how we can enjoy music and video on the go. So on one side you see all this competition evolving. On the other side, there are new business opportunities opening for us. And if you partnered with some so-called competitors in the right way, it can be very strong. Like we partner with Sony to develop optical recording in the past even though we were competitors in the market. So you see this partnership is more and more relevant. And probably going forward you will see more of these from our side.
We've been more and more impressed with the way your products look and function, especially if we look back 2 to 3 years ago and compare your products to Sony, for example. How important is product design at Philips?
Extremely important, extremely important. I think if you look at our strategy, design is always, always there on top because you already mentioned yourself the touch and feel of the product is one of the very important purchase considerations for buyers. It’s not the only one, but that’s the one that not only appeals to the eyes but appeals to the heart. So you’re actually right in your observation. We have been putting far more emphasis on design. We have been investing with suppliers and what we call partnerships in the supplier side -- materials finishing and the refining in design has become much more apparent in Philips. If you take a look at, for instance, your domestic appliances products then there is one thing that Philips stands out for, and it is the design. And when you look at the design, and when you touch the product, and you try to experience these in the shop as well, then you will see that they also feel very good. I’m actually very glad that you mentioned your present experience, because it has been a major effort of ours in last years.
And I think, certainly, that as the technology in the field levels out, whether it be LCD televisions, plasmas, or DAPs the design is becoming more important, because otherwise it’s just a commodity product, and you have to differentiate yourself, right?
Correct, correct.. Every year we win best award for TV picture quality. But the Ambilight TV has yet another dimension. The dynamic TV backlighting makes your viewing experience so much better. So we begin to push the design envelop beyond just plastic and finishing and the metal around it into the way we portray the environment and then to the user experiences: the control of the product should be easy, simple.
With the coming FIFA World Cup in Germany, we’re expecting to see a big push from manufacturers and broadcasters of both DVB-H and T-DMB mobile devices for viewing digital TV on the go. We’re expecting to see this in the host country, Germany, where there is a lot of emphasis on bringing up the infrastructure rapidly, but also across Europe where we think another major standards battle is brewing. How do you see the standards battle playing out globally and which technology will Philips back for mobile digitial TV?
In this part of Europe, there’s no doubt that we very much back the DVB-H for several reasons. One reason is the seamlessness that it has with the DVB Terrestrial. And I think after long periods of very slow growth, DVB-T is now taking off in Europe. You see this in the UK. You see in Germany -- in Berlin you cannot get analog reception anymore. It is shutting down. But you see also in countries like Spain and Italy as it really begins to grow big time. Philips has always been a main player in, let’s say, open standards for horizontal markets in European television. We see the same way for the mobile. And DVB-H is actually coming out of DVB standardization. And we favor that very much. So there is a seamlessness, commonality with DVB-T and you want to get as seamless as possible an experience with as uniform a technology as possible if you want this to be a mass market. And also last but not least, the DVB-H digital broadcasting standardization is a cooperative model. A cooperative model where everybody participates in the development of standards. So DVB-H is the standard that we back for Europe. We should avoid for all means the fragmentation of standards. It will not benefit the user in the end. He will pay more money and he will have more hassle, more diversity, more difficulty to operate these products in the end.
Now, if you talk about the United States -- that is ATSC. There is no ATSC system for mobile. So there you have other standards coming in. And that’s unfortunate, but okay, we can’t correct the past. There, in the United States, we’re not particularly active in anything in that mobile standardization.
And you have a DVB-H System In Package (SIP) coming out this quarter I believe. Is Philips going to be offering a product range supporting DVB-H?
Well, we do, but we don’t have mobile phones in Europe. Hardly any -- our mobile phone strategy is centered in Asia at this moment. And we do have DVB-H reception in our roadmaps as well for other mobile products, so absolutely. And, as you mentioned, we have a semiconductor division inside Philips that’s offering a very attractive platform that integrates DVB-H in the portable digital media platform. So we do have it on our roadmaps. I can’t expose at this moment a particular time where we bring which products, but certainly we’re working on it.
Toshiba and Canon have been making a lot of noise about there SED technology. We also have Samsung showing off large OLED displays. We haven’t heard much from Philips about future display technologies even though you are a leader in that technology. So where do you see the living room television technology going in the next five years? What technology’s going dominate?
Well, two things. First, Philips has discontinued the Philips’ component division a couple of years back. The more traditional CRT displays, we’ve put with LG and we call LG Philips Displays. But, that’s a dying technology, so it’s for the economies of skills and effective use of assets. For the new technology, we have bought a stake in LG LCD, and we created LPL, or LG Philips LCD, joint venture. When we did the LPL deal, we said, “Well, we bet very strongly on LCDs.” And if you talk about the next five years, then you just have to see this in perspective of the scale of activities and the investments and the brainpower and the horsepower behind the technology. Sometimes there are very, very beautiful technologies that don’t succeed because they don’t have the skill, the horsepower and the brainpower behind. So there are two technologies today that do have the massive effort behind them. One is LCD and the other technology, above 42 inches, is plasma. Is plasma a threat to LCD right now? No, plasma is threat as we see it right now to projection TV, because plasma is taking over, let’s say, what projection TV was good at: very large screens.
Right, they’re exceeding 100 inches.
Yeah, exactly. And consumers really tell us, they do prefer much more a flat plasma than a projection TV, no matter which construction you have. So if you take the next three, four, five years, this industry has established around plasma and LCD and this is like a big ship, it’s not gonna be stopped, right? If you look beyond that, then I guess, there will be an natural evolution of technology towards, for instance OLED, SED. The jury’s still out on which technology will be the winner there. But that’s beyond that period of five years. And you may see some penetration of these technologies between now and five years, but they will be niche. A lot of the big companies want to recover on the big investments they did on LCD and plasma.
We’ve been following the development of Blu-ray and HD DVD for quite awhile now. How big of an impact is Microsoft and Intel now supporting HD DVD with Bill Gates calling Blu-ray “very anti-consumer” and how is this format war going to end?
On the last question, honestly, I don’t think anybody knows. To the first question, I think you should look at all the elements. A lot of consumers are interested in a format like this when it is seen as applicable to PCs and consumer electronics. Then the first thing that comes to mind is capacity. That’s the first part that BD [Blu-ray Disc] actually beats HD DVD because BD has much, much bigger capacity. Recordability, same thing. So on the key characteristics, BD is actually much, much better, and we can go on.
Then there was an issue about the cost. Opponents say that Blu-ray disc will cost too much because they are thinner. Okay, now, you can look at history, and you can look at all the statements of the companies that really know how to make discs. That’s also off the table. So you will see recently from the declarations in the HD DVD camp, where they finally recognize the way the consumers look at these issues, and they are now coming with statements (without very clear stories) on how they are going to implement a higher capacity.
In every corner of that field, we say that BD beats HD DVD. I think the issue is more on other fronts, on the interactive approach. That’s why, let’s say, probably, Microsoft is having some issues with that, because we use a Java-based interactive system. In BD we do Java interactivity. And that’s not the favorite format, of course, of Microsoft. But there are also other things that may be playing here in this game, but as a matter of fact, you see the endorsements of the studios on BD, so that, in the end, is one of the most important endorsements -- because if you don’t have material or movies out there in the format, then you can forget it. I think now, at this stage we have all of the major studios backing BD. So what is the bottom line? Does it mean that Blu has won? No I don’t think so. What we all strive for in the past, but it seems at this stage a bit far reachable target, is to say, “Okay, guys, nobody likes to have diversification of standards” and we very much fostered a situation where we could combine this. There has been effort some time ago to combine, and we still believe that the best solution for the industry would be one standard and not two. And having said that, if it is not possible, we will continue to support BD. Now how important Intel and Microsoft statements are for HD DVD? Well, of course they are important. They are two important companies. Between Microsoft issuing a new operating system (Vista) and giving support to the HD DVD -- this is, of course, not very welcome news for BD. But if you look at the last years -- three years, let’s say -- all the oscillations that have gone, people saying, “Well, we don’t join and then we join” you’ll see big moves this way; big moves that way. So I think the oscillation still continues and it will take time before it damps down and remains stable. So what’s gonna happen in the next period, we’ll have to see. We will see who comes with products and material. So it’s still to be seen, but we think BD is going to win.
Are you saying the Blu-ray disc will not cost more than HD DVD once we start hitting mass production?
Yeah, when it starts in mass production, it is marginal. Yeah, but you also have to look at history, how also these things have always evolved. And yes it is a breakthrough in technology. It’s .1 millimeters versus .6 (surface layer), so initially, yes, but as it hits large volume, no.
You’ve had a three or four year relationship with Nike building sport MP3 players yet your new players have been released without the Nike co-branding. Is the Nike alliance off?
The main objective of that alliance was to create a category dedicated to sports and sports fans that you mentioned. There was a total vision there that was created around it, and initially we sold products well. We had some successes in that partnership. But the partnership is, at this stage, discontinued. The market changed, the dynamics changed, the competitors changed, now, then you realize in both companies, “Hey, if our initial assumptions are not coming through then you’d better stop.”
Obviously the iPod is dominating everybody in the MP3 player market with Philips playing a niche role here. Is Philips committed to this market and just how important is it for you?
Oh, absolutely. Absolutely. Our latest player is actually making big sales. Well, you’re right that compared to the Apple sales, Apple is the majority in the market, but we are selling extremely well. If you talk about design, the experience of the user interface, the contextual user interface -- I am happy to hear very nice testimonies of very young consumers that they love the product. I’ve experienced myself, the product is selling extremely well in the United States right now. We just launched the product in Europe. We are very optimistic about that. And this product offers also good functionality because it carries PlaysForSure with good seamless interaction with PC and the services to acquire music. And more options than with apple. So in the total quest for mobile meets home, this is a very important category for us. We are totally committed to this category.
Thank you very much for your time.