Hardware's Hard Knocks

It's far easier to develop code than nurture a physical product.
At Closing, April 23th
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For years, technology industry financiers steered clear of consumer electronics and hardware. It was too difficult to take on the complex tasks of developing gear, manufacturing the physical products and finding shelf space at stores. Internet and software companies are comparatively clean and simple. Google and Facebook are just lines of computer code.

Then a few years ago, companies such as Jawbone Inc., Nest Labs and Roku Inc. started to defy the conventional wisdom that consumer hardware was dull and a dead end. Contract manufacturing with Asian factories, low-cost 3D printing, online sales and community fundraising websites like Kickstarter made it easier for hardware projects to get off the ground. Money from the traditional tech financiers at venture capital firms also started pouring in. 

It brought a renaissance of consumer hardware startups, and thousands of great consumer hardware ideas bloomed. But it turns out it's not easy to make it as a standalone company based on gadgets rather than software.  

Uneasy Life

Revenue growth for GoPro and Fitbit have eroded sharply since their IPOs, illustrating the challenge of sustaining momentum in consumer hardware

Source: Bloomberg

Fitness tracker company Fitbit Inc. and GoPro Inc., the maker of action-sports video cameras, hit rocky roads as public companies. Jawbone is feuding with its creditors. Pebble Technology Inc., one of the early smartwatch companies that started as a Kickstarter project, is selling itself for a pittance, according to tech news outlet The Information. Quirky Inc., a company that helped investors develop household hardware products, folded last year. 

Google parent Alphabet Inc. bought two makers of connected home devices, Nest Labs and Dropcam, and they have flailed. Speaker maker Sonos Inc. has gone through a rough patchXiaomi Corp. and Meitu Inc., both hugely successful smartphone and gadget companies in China, are trying to say they're not really consumer hardware companies. (They are.) Even Apple Inc., the most successful consumer hardware company of all, is running out of iPhone growth

There's no single reason for the struggles of the young consumer hardware companies. Mismanagement has plagued some of them, and that problem isn't confined to hardware companies.

But the consumer device business has uniquely tough dynamics. Like the video-game and movie businesses, consumer hardware companies have to keep coming up with new products or entirely new product categories to avoid being one-hit wonders. Profit margins can be slim, as TV makers discovered long ago. And successful gadgets are at risk of being copied quickly for cut-rate prices. Xiaomi's low-cost Mi Band fitness trackers are outselling the pricier but feature-rich Apple Watch.

Look Out Below

GoPro and Fitbit share prices have cratered. Their share declines from July 2015:

Source: Bloomberg

Hardware companies also need to deal with the complexity of global manufacturing -- problems that have bedeviled even experienced tech giants like Samsung Electronics Co. and its exploding batteries.

Some consumer hardware categories may simply not be big enough to sustain a standalone company. Even China's SZ DJI Technology Co., which makes the market-leading Phantom drones, is targeting businesses because it thinks the market for consumer hobby drones may be limited. GoPro wanted to expand into making its own action sports programming to diversify its business but gave up on that idea as it faltered. 

Despite all the struggles, the consumer electronics category is not barren. Amazon.com Inc. has found success with its digital assistant Alexa speakers, e-readers and tablets and Fire streaming TV gadgets. Google is trying it own home speaker and smartphones. Snapchat parent company Snap Inc. is drawing throngs for its Spectacles sunglasses that record short video clips.

None of those companies, however, are relying on hardware to pay the bills. For them, hardware is a gateway to the companies' real moneymakers. 

That consumer hardware renaissance was short lived. It's time to acknowledge that the conventional wisdom was right: Hardware is hard. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shira Ovide in New York at sovide@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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