Input devices surrounding the PC have been doing remarkably well in a stagnant time. While desktop and notebook manufacturers have been struggling to make their numbers over the last year, Logitech and Microsoft, the ruling champions of peripherals supply, have grown their markets by 60 per cent and 50 per cent respectively (value growth) between 2001 and 2002.
Their success is due to a combination of plummeting prices and a heightened perceived value; people realise they can save money, operate more efficiently or comfortably and get a little entertainment in on the side with peripheral devices. CD burners are a point in case, doubling as storage and filing devices as well as creators of music CDs.
"The peripheral market is one of the fastest-growing sectors we measure," says Phil Burnham, research manager for IT channel research firm Inform. "Factors include the uptake of wireless and cordless peripherals and a boom in the console hardware market, which is driving sales of game pads and memory cards."
Added to this is Logitech's and Microsoft's ability to identify the next big thing and harness it. In August, Logitech announced an expansion of its range into the telecom and home theatre markets, just in time for the Christmas boom. Logitech Australia managing director Marco Manera said the move into mobile telephone accessories is opportune, since the market is experiencing many of the issues faced by IT resellers over the last two years. "These guys have been selling handsets and making good money and all of a sudden sales and margins are down. They realise they have got to sell something else, so I think we are coming in at the right time," he said.
The announcement signalled a desire on Logitech's part to move "beyond the desktop" and, considering the sudden plateau of PC-attached peripheral sales over the last two quarters, it's little wonder.
According to Inform, growth of input devices collectively has dropped 4 per cent in Q3 (to the end of August) compared to Q2. That's not to say that traditional IT markets hold no value; even in a stagnant state it pushes $105 million worth of product through retail alone, Inform says.
According to Manera, the uptake of broadband has breathed some life into videoconferencing devices and Web cameras. Once a complex setup braved by sophisticated businesses to communicate with remote offices, they are now being hooked up to Web-based instant messaging applications like Yahoo and MS Messenger.
"It sounds weird but using video through instant messaging is actually easier than the previous method of using NetMeeting," says Manera. "NetMeeting was very complicated to set up and very tough to use, especially if you have a firewall in your office. Through instant messaging you don't have to go looking for IP addresses to establish contact." Broadband has done away with the poor image and sound quality that hindered interaction on 56K video throughput, and the cherry is that these devices are now selling for as little as $99 retail.
The other sweet spot is wireless, an area that Logitech began branching into 12 months ago. Its mice, joysticks, keyboards and cordless presenters are taking off, particularly in the SME environment, in what Manera calls a contagious manner. "Once you start putting wireless peripherals in an SME or office, it's almost contagious. Everyone walking past the desk sees it and wants to have a go. Once you've gone to cordless you'll never swap back."
Previously a fan of Radio Frequency Technology (RFT), Logitech has released its first Bluetooth products, a cordless presenter and cordless mobile phone headset. Manera says Australia won't see a huge range of Bluetooth products being released before 2003 because, aside from the chipset being $100-$200 more expensive, the 2.4GHz operating capacity chews through batteries like there's no tomorrow.
In the consumer sector, too, wireless keypads and consoles are booming due to the price war between Sony PlayStation, Microsoft Xbox and Nintendo GameCube. This has been a godsend for many regional retailers whose PC and notebook sales have all but dried up. Elke Roos, who runs an independent retail outlet, A-OK Computers, with her husband in Berri, South Australia, says that while "spending is practically dead at the moment", there is still some interest in CD burners and games - the latter of which often leads to upgrades in video and sound cards.
Volume up, value down
It's worth noting that while the price drop has increased volume, margins have been driven down accordingly. An 8-10 speed CD burner, which cost $299 12 months ago, has today been replaced by a 40-speed burner retailing for $129. Pockets of high-margin products remain, such as DVD drives, which are still in their launch phase, but there is little more than eight months in it, or 14 months at the most, before they too become a commodity item, says Sony's Gordon Kerr.
Melbourne-based research firm IT Market Insights expects onboard DVD ROMs to increase from 390,000 units in 2002 to 661,000 units in 2003 (includes both imported systems and those assembled in Australia). By comparison, IT Market Insights anticipates DVD recordables to jump from 41,000 units to 101,000.
With DVD recordables currently retailing at around the $800-$1,000 mark, BenQ marketing manager Kamil Gurgen says the peripherals vendor will start pushing them aggressively when they hit $500, which will be mid-2003, he predicts. Meanwhile, there is still some mileage in bundling CD burners with PCs, according to Gurgen. At the moment he predicts a 50-60 per cent attach rate, which leaves room to manoeuvre, although he admits the sharp decline in prices means BenQ is more dependent on its high-value LCD screens and projector sales to average out profit levels.
The good news is that decreased margins in some areas have not devalued the peripherals sector as a whole. Inform's Burnham says the value of peripherals sold through retail has increased by 108 per cent in 2002 compared to 2001 (based on the first eight months of each year). In comparison, unit sales have only increased 86 per cent.
That said, Logitech's Manera believes it makes sense for VARs to add peripherals to PC and notebooks sales. "The margins on peripherals are up to twice as high as margins on PCs, so the end result is the higher the attach rate, the higher the overall margin. It's easy for VARs to add a couple of points to their bottom line by simply attaching peripherals to their PC sales. But it is a matter of prompting the customer, of asking, do you want fries with that?"
Getting resellers to ask this question when their core focus is desktops, servers and software licences is arguably the biggest challenge for vendors, especially newcomers like BenQ and Caprina. Caprina, which boasts 30 to 40 per cent markups on its accessories, favours a two-pronged strategy, going to market through promotional and office supplies channels as well as IT account managers. The vendor admits that targeting VARs to get products in front of the customer is an uphill slog.
"It's a lot about changing the perception of the account manager. They have an attitude like, I'm working on a $100,000 deal and I don't have time to worry about peripherals'."
Volante, which sells primarily to the corporate and education markets, is a perfect example. "We do sell a lot of [peripherals] but we don't pay them too much attention because they're an easy sell," says a salesperson. "It's a high-volume thing."
In many cases this develops into a chicken-and-egg syndrome with regard to customer awareness. Sydney-based reseller Portable Computer Systems focuses on main systems such as notebooks and PDAs and doesn't "really sell a lot of that peripheral stuff".
"We're customer-led. You're better off asking the customer why they're not buying those little devices with their main systems."
Many vendors argue that the reason customers aren't asking for things like USB Flash drives as a replacement for a 10-pack of floppy disks is because they are still perceived as being expensive specialty devices.
Of course, with the range of peripherals on offer and the aversion to holding stock, it's understandable that VARs relegate the products to the fringe. Manera says that rather than a hard bundle' the most popular option nowadays is to offer customers a choice with soft bundles'. "For example, you buy your notebook and then make a selection from a list of accessories, mice, cameras, etc."
Sony's Kerr argues that it isn't necessary for resellers to hold stock to be successful in this arena. It's the resellers that hold zero stock and make the most out of consumables that are doing well, he says. Bearing in mind that hardware margins will continue to fall, there may be some merit in urging resellers to look for returns in peripherals media (tapes, DVDs, CDs, Compact Flash cards and so on) rather than the devices themselves.
Hewlett-Packard's imaging and printing group generates 54 per cent of its revenue from consumables, and if this kind of split is to be mimicked in the peripherals game, resellers should consider getting in on the act.