Is It Payoff Time At Thomson?

Alain Prestat disdains the usual perks of his CEO post. Lunches at swank Parisian restaurants? A waste of time, sniffs the trim, athletic, 44-year-old head of French consumer electronics powerhouse Thomson Multimedia. First-class travel? Only for softies. And while most CEOs delegate inspections of far-flung factories, Prestat visited all 39 Thomson sites in 16 countries within a year of taking over in 1992. "I never stop," he says. "I fly to Osaka like getting on the Metro."

Prestat says his no-frills regime "broke all the taboos" at state-owned Thomson, which was losing money and market share when he arrived in 1992. Since then, his flagship unit--Thomson Consumer Electronics Inc. in the U.S.--has been breaking its sales records. More than one million American TV viewers are now capturing dazzling digital images from satellites using the company's RCA-and GE-brand antennas and set-top boxes. Thomson is pioneering new product niches, from so-called "wireless cable" broadcasting to digital video disks. And it has just unveiled a futuristic vision in which televisions double as gateways to the world of digital information. "Before, we were a consumer electronics company like all the others," crows Prestat. "Now Thomson is a trendsetter, not a follower."

Yet ironically, the mood at Thomson Consumer Electronics' spacious new headquarters outside Indianapolis is far from ebullient. The unit's stunning successes in digital technology haven't done enough to buoy parent Thomson Multimedia--part of a government-owned conglomerate--which suffered a $122 million net loss last year. "We're up $200 million to $300 million [in revenues] this year, and we're depressed," says Joseph P. Clayton, executive vice-president of the U.S. unit.

Prestat, unfazed, places the blame on $2.45 billion in debt he inherited from predecessors. Servicing that wipes out Thomson's slim operating profits (chart, page 114)--and some of it will evaporate if the French government privatizes Thomson next year, as expected. Even so, Prestat can't entirely dismiss a technology paradox: success without profits. Indeed, placed in the spotlight thanks to its digital satellite system (DSS), Thomson appears to be a test case for the entire consumer electronics sector--ever a low-margin box business. And while the shift from analog to digital technology opens new opportunities, like DSS, it doesn't spell instant wealth. "With technology exploding all over the world, it's harder than ever to keep a competitive edge," observes Lonnie Edelheit, research chief at General Electric, which sold its RCA and GE consumer brands to Thomson in 1987.

With no other choice, Prestat and his colleagues are testing a new strategy. To get the most mileage from research and development, they're trying to create "architectures" for whole families of new products. In theory, the products can then be introduced in rapid succession, with minimal investment in new plants, thus keeping Thomson one step ahead of competitors.

FREEING UP CASH. To make this concept work, Thomson must still take all the obvious steps to stay lean and limber. Since 1992, Prestat has slashed costs, fired redundant managers, and unified his splintered Paris operations. He has also given U.S. managers freedom to execute projects. For example, he freed up $150 million in scarce cash for DSS, which was launched with partner Hughes Electronics Corp. And he rallied affiliate SGS-Thomson Microelectronics to design chips for the new, digital products.

He's also counting on Clayton to keep Thomson number one in all its key products in the U.S. It's already the top vendor of color TVs, VCRs, and satellite systems. To remain so, Thomson will plow $50 million into DSS advertising this year, and pump up distribution at stores like Wal-Mart, and Sears. Thomson is taking DSS into Latin America. And by yearend, Clayton says, Thomson will start building the same gear for sale under other brands, including Japanese companies--some of which have been Thomson suppliers in the past. "That feels very good," says Clayton, savoring the irony.

1 BILLION DOLLAR DEAL. The real excitement, however, lies in becoming the architect of digital products. And the early signs are good. In September, Thomson's fine track record with DSS helped it clinch a $1 billion contract to supply set-top boxes to a video entertainment consortium called Tele-TV, made up of Bell Atlantic, Nynex, and Pacific Telesis. The group will build a wireless cable network that will let the phone companies beam movies and games into customers' homes.

The best part: 50% of the new boxes' circuits and design innovations, such as chips that compress digital signals, are identical to what's inside the DSS box. That gives Thomson precious economies of scale in sourcing and manufacturing. And there are other products on the horizon. By the time the Baby Bells fire up their wireless cable systems, in the fall of 1996, the first generation of so-called digital video disks (DVD) will arrive in American homes. These optical devices will store hours of movies and music on compact disks.

DVD will make use of the same mathematical formulas, embedded in chips, that broadcasters are using to compress programs before bouncing them from satellites down to DSS antennas. So, in effect, Thomson's DSS technology is already being incorporated into the DVD prototypes being developed by a dozen, mostly-Asian manufacturers. That will translate into license revenues, and relative ease of entry when Thomson is ready to manufacture.

After DVD, Thomson predicts a transition so profound "that every product we make will change," says James E. Meyer, senior vice-president for product marketing. By early next century, television sets themselves will go digital and begin to merge with computers, according to a vision shared by Thomson, Sony, and many others. That doesn't mean executives will play with spreadsheets from the living-room sofa. But online services--from shopping and banking to light Internet browsing--will be available on any television set.

For manufacturers, this spells an opportunity to replace tens of millions of television sets. And each new one is likely to have a built-in DVD. If Thomson gets its way, the TVs will also contain the intelligence to tell what kind of signal is coming in, despite the disparate internal encryption codes of satellite, cable, or wireless transmission systems.

To convince the public, though, Thomson has to make navigating the system much easier than, say, browsing the Internet today. "If you think 500 TV channels are confusing, imagine what happens when you add 500 services," muses Louis E. Lenzi, vice-president of Thomson's American Design Operations. Lenzi sees this as a major opportunity. He's working on the viewing guides consumers will need when the worlds of TV and computing collide.

By Christmas, a second generation of DSS equipment will give users a glimpse. As viewers surf 175 channels, they'll be able to pull down screens called channel banners, with program information, and highlight choices with a click of a remote control. Soon, the familiar RCA canine mascot, Nipper, will be enlisted as a kind of intelligent agent. He'll remember each family member's viewing choices and make suggestions. "We will no longer offer just boxes but systems and services," says Prestat.

The idea of couch potatoes surfing the Internet may sound implausible. but most computer analysts think there is room in cyberspace for new devices that could kick the multimedia ball into the consumer electronics court. Whether they are sub-PCs or large-screened Web-browsing televisions, "they will follow the consumer electronics business model: price points, distribution, and branding," predicts Frank Gens, senior vice-president of research at International Data Corp. in Framingham, Mass.

CONUNDRUM. To ensure that the transition goes smoothly, Thomson has pulled out the stops in research, hiring as many as 200 new engineers and beefing up its expertise in human interfaces. And Clayton is exploring software-related acquisitions, though he won't specify targets.

The question is whether all of this digital pioneering will enable Thomson to finally solve the core conundrum of consumer technology: how to make money despite huge manufacturing costs and price wars. If so, they'll be bucking a global trend. Japan's $69 billion giant Matsushita Electric Industrial Co., for example, "is trying to get out of traditional audio and video products," says Chuck Goto, a managing director of Smith Barney Inc. in Tokyo. The reason: Only a tiny fraction of its profits come from its high-tech Panasonic brand goods.

Against this grim backdrop, Thomson seems to be holding at least a few good cards. After all, with DSS it managed to find and dominate one of the rare "killer applications" of the multimedia age. And the company has a shot at creating a continuous stream of related products. Pioneering a new digital consumer market, even without vast profits, is not a bad starting place.

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