Will Philips Sell The World On The Vcr Of The Future?

It was another blow to Europe's beleaguered consumer-electronics giant. In mid-July, Gaston Bastiens, the top executive heading up Philips Electronics' crucial push into multimedia players and programs, abruptly quit to take a better offer at Apple Computer Inc. The defection occurred just as Philips faces perhaps the toughest marketing challenge in its 100-year history: convincing the world that its new Imagination Machine will become the VCR of the 21st century.

It's a high-stakes game. The Imagination Machine, formally known as compact disk-interactive (CDI), is among the few critical products that Philips Chairman Jan D. Timmer is counting on to revive the Dutch giant's depressed earnings. It is also central to Philips' strategy to transform itself into a Sony-like company that derives much of its profits from entertainment programming. If Philips succeeds in getting its share of this megabucks market, it may well hang on to its tenuous place as the West's leading consumer-electronics company. But if it fails, it risks sliding into the industry's second tier.

STILL SMARTING. The new device has been in U.S. stores since last October and in Japan since April. A European launch is scheduled for September. Potential rivals such as Apple and IBM are still pondering their strategies. With a headstart, "Philips has an important opportunity to lead the way in a whole new genre," says Stephen Reynolds, media analyst at Link Resources Corp.

Philips insists that Bastiens' departure won't change its CDI strategy or stall the product's rollout. "We're determined to keep the lead against competing formats," says Henk Bodt, head of Philips Consumer Electronics. Problem is, Philips has never been known for whiz-bang marketing. Executives there are still smarting from Japan's runaway hits in the 1980s with VCRs and compact-disk players--both Philips inventions.

So the choice of a successor to Bastiens will be crucial, because Philips can't afford to blow it this time. After putting the company through a radical restructuring that has axed 45,000 jobs since 1990, Timmer finds still more trouble. Stagnant demand and bloody price wars are slashing profits throughout the industry. When the $32 billion giant's first-half results were announced on Aug. 6, analysts expected profits to plunge about 50%, to $55 million.

Between the earnings slide and other surprise personnel shakeups, Philips' stock has sunk 35% since mid-June, to about $15, losing the ground it gained in the last year. "Investors have lost patience," says London analyst James Golob of S. G. Warburg Securities.

That's not all. On July 30, Philips announced that it found unexpected bugs in its digital compact cassette, another big technology bet--one that the company hopes will succeed today's audio cassettes. The delay will wipe out the lead over a competing Sony Corp. audio format for the Christmas selling season.

A successor to the CD, the CDI player hooks into a TV to display programs mixing stereo sound, graphics, photos, text--and eventually video--stored on an mptical disk. The software lets users interact with programs, rather than just watch them.

A disk from ABC Sports Inc., for example, leads you on a tour of the 18 toughest golf holes in Palm Springs, Calif. With the click of a remote control from a menu of on-screen options, you select the player's hole and club and determine the angle and speed of his swing as ABC sportscasters narrate the play. Philips counts about 300 such titles in production--two-thirds from its own studios.

But Philips faces a tough job persuading consumers to shell out $799 for the player and $19 to $59 per disk. The CDI investment, estimated at $250 million, won't return much profit for at least three years, figures Warburg's Golob.

LIGHTS, CAMERA. To hedge its bets, Philips has gone on a dealmaking spree recently to hook a wider audience for CDI (table). While executives hint that first-year sales in the U.S. should hit 35,000 units, meeting Philips' modest targets, making it a big hit depends on persuading outside producers to create programming. Big-name independents are mostly holding back major CDI investments until they see more player sales.

Japanese leaders Matsushita Electric Industrial Co. and Sony both have delayed marketing a consumer version of CDI because development of Japanese programs has been slow. So Philips is now stuck shouldering the high costs of educating consumers. Philips also may face a format brawl: Apple and Toshiba Corp. are rumored to be readying their own multimedia machine, and so is Tandy Corp. The Tandy attack especially stings since it recently dropped CDI from its U.S. Radio Shack stores after only one season, due to poor sales.

Philips hopes to rally program producers around CDI before other standards take root. Retailers are also hopeful about a first-time U.S. TV ad blitz planned for Christmas. "This thing appeals to anyone from crib to crypt," enthuses Stanley M. Grossman of New York's Sixth Avenue Electronics Inc., which has sold 600 CDIs since October. The bosses at Eindhoven headquarters hope so. Otherwise, another big opportunity could pass them by.

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