Standards and commoditization

New York Times article on the changing face of consumer electronics retailing with Best Buy and Circuit City fighting to stay in the game with WalMart. The article puts its finger, in passing, on a few major and broader trends: commoditization is happening sooner in the product lifecycle and this seems to be driven by the two forces acting in concert: standardization and the entry of Chinese ODMs.

Clayton Christensen references a framework for the new product lifecycle based on the evolution of the basis of competition. Early in the lifecycle vendors differentiate their products based on functionality. As the product category matures, the basis of competition shifts, successively, to reliability, then to convenience and finally to price. Once price becomes the basis of competition, the commoditization stage has been reached. "A product becomes a commodity within a specific market segment when the repeated changes in the basis of competition completely play themselves out, i.e., when market needs on each attribute or dimension of performance have been fully satisfied by more than one available product."

The NYT article points out that the progression through these stages to commoditization is happening faster now than ever before:

The rapid succession of digital entertainment devices — the DVD, the digital camera, the MP3 player — should have created a golden age for the stores selling them. But these wonders share a common problem with a previous digital product that had been a hit with consumers: personal computers. Early in each product's life, prices have fallen and models and features have changed quickly, leaving retailers with expensive, out-of-date inventory. Once that happens, the products become a commodity, and profit margins — always tight in the electronics business — became virtually nonexistent.

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Standardization can play an important role in speeding up the product lifecycle by tending to remove competition based on features and functionality - as an example, most of the core functionality of a product category such as "WiFi AP" is now standardized and it is very hard for AP manufacturers to differentiate their offerings. The emergence of a standard also has other visible effects/implications: (1) it signals a broad consensus on specifications, (2) it encourages multi-vendor adoption of the standard, (3) competition between vendors drives down the cost, (4) lower costs drive adoption, which leads to even lower costs in a vicious/virtuous cycle. When the emergence of the standard is timed well relative to the market, each of these effects reinforces the others. WiFi is a great example of each of these effects.

A side effect of standardization is to encourage and ease the entry of Chinese/Taiwanese ODMs with their low-cost products through openness of specifications, multi-vendor support for components, faster adoption, and higher volumes.

The Wal-Mart exec quoted in the article clearly recognizes this dynamic:

"Our customer is getting smarter about technology and wants to buy it sooner," said Gary Severson, Wal-Mart's senior vice president who oversees electronics. Moreover, some digital products, particularly at the low end, are standardized around certain specifications without the subtle variations in features and quality of, say, stereo speakers. As a result, Chinese manufacturing plants now produce millions of computers or DVD players, much as they stamp out Barbie dolls and running shoes.