Is Innovation the Bane of Commodification?

[Damion Chaplin]

<div class='os_post_top_link'><a href='http://news.com.com/Innovation+the+antidote+to+TV+commoditization/2100-1041_3-6134219.html?tag=nefd.top' target='_blank'>http://news.com.com/Innovation+the+antidote+to+TV+commoditization/2100-1041_3-6134219.html?tag=nefd.top</a><br /><br /></div><i>"Sony might have some concerns going into this holiday selling season (Blu-ray shortages, battery recalls and the success of the PlayStation 3), but the commoditization of flat-panel televisions is not one of them. "Frankly, we don't see that as a fear. We really see it more as an opportunity," Phil Abram, Sony's vice president of TV marketing, told the crowd gathered here Thursday for iSuppli's Flat Information Displays Conference 2006. "TV manufacturers have faced the threat of commoditization before in the CRT industry," he said, and innovation is the key to avoiding it. "All flat panels are not alike," said Abram. "The threat of commoditization shows a lack of imagination" on the part of television manufacturers. Though innovation could mean making a TV with improved contrast ratio or faster response time, a majority of consumers do not buy a specific television because they know the difference between 1080p and 1080i. As Abram put it: "Consumers don't buy flat panels. They buy televisions."</i><br /><br />Sony is arguably the foremost expert of TV commodification (a.k.a. commoditization). In the Asian market, Sony is often copied by knockoff companies who then offer a similar product for half the price. We don't see as much of that here in the U.S., and in many ways I believe Sony has brand recognition going for it. If you walk into any drug store and look at their portable CD players, you'll see a cheap no-name for $19.99, a mid-range one for $29.99 (often a GE or Sanyo brand), and a Sony for $39.99-44.99. And if I had to choose, I'd choose the Sony, and so would anyone else concerned with quality. It's not the greatest example since we're only talking a $20 price difference and in the LCD arena we're talking thousands of dollars. However, I still believe that Sony's brand recognition (for better or for worse) largely protects them from commodification. Innovation helps too, though too often Sony's innovations are too gimicky for me (changeable faceplates on my LCD? Can't I just get it in black? :wink:).

[Felix Torres]

Its an interesting thesis the Sony folks present here.
Sony's official take on commoditization, the transformation/replacement of previously-expensive, prestige-laden products into generic, commodity-priced products, is that they can innovate their way clear of it; in effect, constantly redefining their product to stay away from price-based competitors.
I'm thinking the reality is a bit different: As the article points out, 30% of all HD flat panel displays are being sold by second- and third-tier vendors. Add in the value lines from name-brand vendors (Sharp's non-Aquos sets, Philips' Magnavoxes, etc) and I would argue that commodity displays amount to something near 50% of the market. That is a huge jump from last year. Add in the massive price drops and price compression in the name-brand product lines and I'd say the market is well along the road to commoditization.

(Sony itself has two lines of similarly sized, but differently-priced LCDs. And they dropped out of the PDP business altogether because of price pressure; they couldn't innovate their way to profits there.)

What Sony and its japanese competitors are actually achieving with their innovation is not to *prevent* commoditization but side-stepping the worst efects by segmenting their product lines and trying to skew sales as much as possible to the high-end. This should work nicely... for a while.

The HDTV industry is young enough and the technologies raw enough that the tactic should work for a few more years. Eventually, though, diminishing returns will set in and the difference between the "innovative" premium models and the generics will fade to almost nothing and at that point the pricing premium will collapse, leading the premium brands to adapt or fold.

The PC business went through this between 1985-95. (The big-name players in the PC industry fought off commoditization for about ten years but by the mid-90's their fate was clear; IBM, for one stopped making money off desktops long before getting out of the business--they survived off servers and laptop sales and service revenue, instead.)

It should be interesting to see how long the name-brands can play the innovation game in this arena; for PDPs, I think not very long--three years, maybe. For LCDs, there is a clearer, longer, evolutionary road to the tech, so I'm guessing at least 5 and possibly as many as 10 years.

But sooner or later, a configuration will emerge; a set of features and specs readily available that isn't merely "good enough", but rather "As Good As Anybody could Want". And at that point, Sony is going to have to innovate themselves a whole new game, because this one will be played out.

In the end, the only winners in the innovation vs commoditization game are consumers.
Hurray for us. :wink: