TCS Daily

Exit Signs

By Dominic Basulto - June 24, 2004 12:00 AM

At a time when the technology sector appears to be on the cusp of a major rebound, it seems that nearly every technology company has been ramping up efforts to find the next great billion-dollar market opportunity. By now, every tech firm has some grand unification theory involving 'digital convergence' or the 'networked home' or something involving "on demand" digital content. PC maker Dell is extending its low-cost business model to consumer electronics such as flat-screen TVs; networking giant Cisco is experimenting with a Wi-Fi stereo system; and Hewlett-Packard is working on the next-generation telephone/Pocket PC. The media and market pundits lavish kudos on these companies, declaring them visionaries for entering new, billion-dollar markets boasting hockey-stick growth curves. But what about the companies -- like Sony and Microsoft -- that deserve praise for being able to recognize when the time has come to exit potential billion-dollar market opportunities?

The most obvious example, of course, is Sony's decision to discontinue the Clie PDA product line and exit the U.S. market for handheld organizers. The move, as might be expected, caught more than one IT analyst flatfooted: What was one of the world's great technology companies doing, getting out of a business just when the handheld PDA market was on the brink of disruptive change? In 2003, Sony was the third-largest handheld maker, accounting for 1.4 million units out of 10.7 million units shipped worldwide. Moreover, Sony was hardly behind the curve from an innovation perspective -- the company was the first to offer Palm OS-based PDAs with MP3 playback capabilities and the first to offer PDAs with built-in digital cameras. Sony is also one of the largest investors in PalmSource, guaranteeing it a substantial say in the future direction of the handheld organizer market.

Yet, Sony decided that the market for handheld gadgets was getting overcrowded, with the continual arrival of new beefed-up gadgets such as smart phones that offer much of the same functionality as a typical PDA. Moreover, the growth forecasts from research firms were disappointing. Gartner, for example, predicts that demand for conventional PDA handheld devices will remain flat for at least the next three years. According to Sony, it was simply time to re-examine the economics of the conventional PDA business and decide whether it made sense to divert resources to the U.S. market.

Sony is not alone in getting out of a key market before margins and market share numbers collapsed. In May, Microsoft announced its intention to exit the Wi-Fi home networking gear market -- at the exact same time that many pundits are calling Wi-Fi the Next Big Thing. After two years, Microsoft decided that the underlying economics of wireless networking just did not fit into the company's overall strategy, especially since the company could not unseat Linksys as the market leader in the wireless home networking market or clearly differentiate itself from other Wi-Fi rivals. In fact, market share was already starting to slip in Q1 2004, with Microsoft's share slipping from 9% to 6.6%. Viewed from this perspective, Microsoft's move made sense.

At a time when companies seem to have fallen in love with "digital convergence" (haven't we heard this before?), it makes sense to step back and consider more cautiously what makes sense to pursue -- and what doesn't make sense to pursue. In a recent Business Week article, CEO Steve Jobs described why Apple had turned down an opportunity to enter the mobile communications market, emphasizing that: "I'm as proud of what we don't do as what we do do." In other words, Apple will not enter any market that will require the company to overextend itself or move away from its core competencies.

This is not to say that tech companies shouldn't explore new market opportunities. For distressed tech companies like Sun Microsystems -- with a stock price that has languished around the $5 mark for the past two years -- sometimes it makes sense to just throw something against the wall to see what sticks. For other companies, though, sounding the drumbeat of digital convergence may do more harm than good. Companies should focus on what they do best, ignore the marketing hucksters, carefully evaluate inflated talk of billion-dollar market opportunities, and establish real benchmarks for when and where to exit fast-changing markets. Walt Disney's recent move to branch out into video on-demand services through its MovieBeam initiative is the kind of move that is easy for Wall Street analysts and Main Street investors to understand; Nokia's decision to enter the online gaming market through its N-gage handheld phone/game console is not.

Going forward, investors, analysts and shareholders might be better served by understanding better the way that companies attempt to preserve shareholder value by exiting markets that do not meet rigorous growth or market share assumptions. This is difficult, of course, without pressure from Wall Street. But, by then, it could be too late. Like Sony and Microsoft, the most successful companies will be those that are able to pick and choose key market niches, stop on a dime, and keep an eye on the overarching corporate strategy in an attempt to build long-term shareholder value.

Dominic Basulto is a TCS contributor. He recently wrote about the 99 cent technology store.


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