The Case for Smarter Electronics

Sales and Distribution White Paper

Smarter Electronics

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But change does not come easy to this industry. For many decades electronics companies have made a living designing, manufacturing and shipping products into the channel, never to hear from them again. They did not have relationships with the users of their products. They did not do customer service. In fact, while nine of 10 electronic company CEOs fully anticipate major changes in their industry in coming years, only 60 percent of them are confident in their ability to manage that change.4

As a result, new players from outside the traditional electronics industry are already entering the market. Service-oriented companies, software providers and even big-box retailers are developing alliances with fast-moving, forward-thinking startups. They are already building a more connected electronics industry. And they are doing this by combining smarter products with new services that are becoming the building blocks of smarter planet systems, such as smarter healthcare, smarter transportation and smarter energy.

To meet these challenges, electronics manufacturers must abandon old ways of doing business. They must deliver products and services that make the most of the Internet to collect and analyze data and create new value. They must foster new and direct relationships with their customers. And most importantly, they must recognize that their products are part of a broader ecosystem, a so-called “Internet of things,” a platform for the development and delivery of services that will significantly advance the entire industry.

But for the companies that embrace this new landscape, the opportunity will be enormous. They will learn more about how their products are used and how to use that information to tighten their operations, from design to delivery. They will develop new, higher-margin revenue models based on services and fueled by ongoing relationships with their customers. And they will connect the dots between disparate devices — and grow the entire electronics market as a result.

In short, they will build a smarter electronics industry.

In many ways, we have been living in the era of electronics. In the last 100 years, the electronics industry literally has revolutionized the way we live and work, laying the foundation for powerful waves of innovation, from radios to robotics to medical imaging. And the industry continues to drive innovation today, outspending all other industries in research and development and fostering the widespread adoption of technology, from personal computers to mobile phones.1

The capabilities of these innovations are enabling us to instrument our world, collect and analyze valuable data, integrate disparate systems and improve the efficiency of entire industries, from healthcare to finance to retail.

But the electronics industry itself has been slow to take advantage of the remarkable potential its own products enable. There are still billions of isolated, unconnected electronic devices in the world. Information about the use of these devices is not collected or analyzed. There are precious few services being offered alongside electronic products. And there is almost no communication between these devices in their respective operating environments.

The result is a series of commodity products under severe margin pressure. In 2009, the consumer electronics market saw a nearly eight percent decline in overall revenue, even as unit volumes increased by 10 percent.2 Even smart phones, one of the hottest electronics markets right now, lost four percent of their margins in the last two years.3 This is not a sustainable trajectory.

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The electronics industry has been slow to take advantage of the remarkable potential that its own products enable. There are still billions of isolated, unconnected electronic devices in the world.

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The Path to Smarter Electronics The transformation into a smarter electronics industry demands that companies capture the opportunity resulting from connected devices and services and develop new business models, from design to delivery and beyond. It consists of two main phases, which must be accomplished at both the company and industry level:

Connect, Collect, Analyze By connecting devices to the Internet, several things become possible. Information about how a product is used can be collected. Updates and upgrades can be sent directly to devices. Service issues can be detected and remediated automatically. And eventually, devices can communicate and share information with other devices on the network, igniting a host of new capabilities and possibilities.

This process starts with more sophisticated software in the products themselves. Already about 70 percent of the development costs of some televisions are spent on software. And a single smart phone can include as many as 11 million lines of code.5 This built-in intelligence gives electronic devices extraordinary new capabilities. For example, they can detect, diagnose and debug problems at any stage during the product’s lifecycle, from the design and testing phase through to the end market. In addition to improving customer satisfaction, these capabilities can actually speed a product’s time to market by creating new efficiencies during the development and testing cycle. And these intelligent devices can evolve as market demands change, upgrading and updating features remotely and automatically.

One example is a manufacturer of office productivity products, working with IBM® to develop an advanced device and printing management system. The system infuses office devices with real-time reporting and monitoring, significantly reducing print-related costs, improving service and cutting back on carbon footprints. The system can identify service issues with devices and automatically route alerts to local service desks for remediation before service is affected.

Even a small amount of intelligence embedded in a device positions it as a potential node in a more powerful network. In this scenario, the compute-intensive work is done not by the device itself, but on more powerful computers that aggregate and analyze the data in the cloud.

For example, a medical device manufacturer developed a patient care system that allows clinicians to remotely access and analyze patient information from implantable cardioverter defibrillators (ICDs) and pacemakers. Using a Web application, clinicians can analyze therapeutic and diagnostic data from a patient’s device, and be alerted to a potential medical condition without patients having to leave their homes. The data can be added to the patient’s electronic health record, providing a more comprehensive view of overall health, or cross-referencing on patient record against other data sets to search for anomalies.

When companies harness the data their products give off, they can apply powerful analytics that inform every part of their business, from design to delivery, from supply chain to services. But intelligent devices are only the first step toward a smarter electronics industry. Soon, there will be a trillion connected devices in the world.6 By combining the data coming from these devices with information throughout the web, a new platform emerges, one with the potential to greatly enhance the usefulness, longevity and profitability of today’s electronic devices.

The Case for Smarter Electronics

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Combine, Create and Act The end state of a smarter electronics industry is the understanding that every electronic device, whether it lives in an office, a living room, a car or a factory floor, can be a node in a network. We call this the “Internet of things.”

This realization brings with it some powerful implications. For one thing, it turns an industry into a system, with far more potential. It makes the case for open standards, which are crucial if we are to design environments of connected devices in a home, car, hospital or factory floor. And it also places new importance on collaboration throughout the industry, because makers of previously unrelated electronic devices will need to break down barriers and develop products that can communicate with each other.

When data and services from these different devices are combined in the cloud, the resulting network becomes a platform, like the Internet itself, with endless potential. We are just beginning to explore the possibilities in this world, such as appliances or equipment that automatically cycle on and off when they receive price signals from the electricity grid. Or services that aggregate a user’s habits and preferences across all their media devices (smart phone, television, computer, etc.) and serve up relevant content as a result.

Because these key components will live in the cloud, it allows for the rapid development of these services at low cost, enabling experimentation and iterative improvements. It also hides the complexity of these systems from the user.

One example of how combining smarter electronics devices in a single operating environment can transform that space is in the home. Though it has been talked about for years, the connected home is now becoming a reality, thanks to an increase in web-enabled home devices and the potential to mask from the user the complexity of managing a home network of devices.

ABI Research expects the connected home global market to grow by a compound average of 23 percent annually to more than $10 billion in 2014.7 Already service providers are combining content, applications, networking, gaming and even energy management in their offerings, catering to a market looking for a more integrated experience.

Players from outside the traditional electronics industry are developing alliances with fast-moving, forward-thinking startups. They are already building a more connected electronics industry.

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For example, a consumer electronics company is already beginning to explore these possibilities by creating a first-of-a-kind television service. In addition to traditional television broadcasts, the viewers can access and navigate personalized content with a standard remote: everything from web services to social networking sites to television and movie programs. The television actually learns user preferences over time and recommends specific content. To do this, the company needed an advanced, intelligent infrastructure on which to establish and support a dynamic community of users and service providers. Since the solution was ultimately expected to connect large numbers in many countries of internet-enabled televisions, scalability was a key consideration.

Openness was also essential. This organization wanted to grant equal access to all content and service providers — over the more restrictive and proprietary “walled-garden” approach to web services and content.

For example, smart meters (and the associated customer portals being created in the cloud by energy providers) allow consumers to see their usage profile and adjust their energy consumption habits to achieve certain goals, such as reduced cost or carbon footprint. And several electronics manufacturers, making everything from thermostats to security systems to televisions, are releasing products that work within these constructs. Whirlpool recently announced it would produce 1 million smart-grid compatible clothes dryers by 2011.8

This new paradigm provides opportunities for innovative services that make the most of the computational power and scalability of the cloud. Using a common services delivery platform based on industry standards, usage data on any kind of electronic device can be collected, aggregated, analyzed and used to inform new services that add revenue streams to the traditional electronics business model.

Electronics manufacturers must abandon old ways of doing business. Recognize that your products are part of a broader “Internet of things,” a system for the development and delivery of services that will significantly advance the entire industry.

The Case for Smarter Electronics

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The intelligence of the technical architecture provides the company with significant business model advantages. The new model has radically increased product registrations. And by analyzing preferences and viewing habits, the television service portal has the ability to create user profiles that can be used to personalize the viewing experience by highlighting or directing users to recommended content. This derived intelligence has powerful implications for more intuitive usage, and lays a solid foundation for delivering new apps and simplified personal interaction that will generate new revenue streams.

The company’s initiative expands and redefines the focus of television product development with service integration. They are able to simplify and streamline at the product level by embracing key elements of the cloud computing model, while at the same time laying the groundwork for more product line flexibility and efficiency down the road.

Conclusion The time to transition the electronics industry into a smart system is now. The demand is strong. The products are maturing. And the technology to tie it all together is available.

Ultimately, however, the industry will need leaders that accept the challenge to transform their companies and the industry at large. IBM has not only helped to support this transformation in other companies, it has undergone the same transformation itself. Years ago we remixed our portfolio toward services, software and solutions. We invested in offerings that fostered communications between our clients and our company. We embraced open standards to allow for a stronger, more dynamic information technology industry.

These shifts not only pulled our business from the grips of commoditization, they also positioned us well for the services economy of the 21st century. That same transforma-tion is what’s required for electronics companies today. We’ve been through it. We can help. Let’s build a smarter electronics industry.

The time to transition the electronics industry into a smart system is now. The demand is strong. The products are maturing. And the technology to tie it all together is available.

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© Copyright IBM Corporation 2010

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Produced in the United States of America October 2010 All Rights Reserved

IBM, the IBM logo, Smarter Planet, the planet icon and ibm.com are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. If these and other IBM trademarked terms are marked on their first occurrence in this information with a trademark symbol (® or TM), these symbols indicate U.S. registered or common law trademarks owned by IBM at the time this information was published. Such trademarks may also be registered or common law trademarks in other countries. A current list of IBM trademarks is available on the Web at “Copyright and trademark information” at ibm.com/legal/copytrade.shtml.

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1 http://www.booz.com/global/home/what_we_think/reports_and_white_ papers/article/470866892 http://www.dailymarkets.com/stocks/2010/04/14/analyst-interviews- semiconductor-outlook-and-review/ According to the Consumer Electronics Association (CEA), the 7.8 percent revenue decline in consumer electronic goods for 2009 was entirely on account of weaker pricing, as unit volumes of consumer goods increased around 10 percent.3 Credit Suisse,”Smartphone Report”. 31 August 2009,Global Equity Research Credit Suisse: Margins for large smart phone makers have declined from average of 42.5 to 38.5 in two years. 4 http://www.ibm.com/ibm/ideasfromibm/us/ceo/20080505/5 http://news.cnet.com/8301-13580_3-9949793-39.html6 http://www.ibm.com/ibm/sjp/03_09_2010.html7 http://www.abiresearch.com/press/1499-Connected+Home+Devices+ the+Potential+%E2%80%9CNext+Big+Thing%E2%80%9D:+a+23%25+ Market+Value+CAGR+over+the+Next+Five+Years8 http://investors.whirlpoolcorp.com/phoenix.zhtml?c=97140&p=RssL

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