frog design's New Lily Pad
By Peter Burrows
On Aug. 3, one of tech's most influential entrepreneurs quietly cashed out on an illustrious 35-year career. Or, to hear him tell it, he paved the way for future achievements of an even grander nature. The luminary in question is Hartmut Esslinger, the co-CEO of frog design. Since he and wife Patricia Roller founded the company in 1969, the 60-year-old free spirit has helped define the aesthetics of the Information Age. Sony's (SNE ) Triniton TV was designed by frog in 1978. Also in the firm's portfolio: Apple's (AAPL ) Macintosh in 1984, and the redesign of Dell's (DELL ) e-commerce Web site in the late 1990s.
"Hartmut [brought] a sense of Eurodesign to Silicon Valley. He showed [that] all the beautiful things he did for European and Japanese companies could now [be done for] electronics and computers," says Chee Pearlman, former editor-in-chief of I.D. Magazine.
Maybe more important, the German-born Esslinger's larger-than-life persona made him high-tech's first industrial-design superstar -- and set the mold for design firms such as IDEO, Lunar Design, and Pentagram Design that now help corporations around the world better connect to their customers. He brilliantly capitalized on the fame that came with laying out the minimalist "Snow White" design language employed by Steve Jobs in Apple's groundbreaking products of the 1980s (Esslinger would also design the chic "Cube" PC made by Jobs' NeXT Computer in the late 1980s).
In 1990, he appeared on BusinessWeek's cover, dressed in leather and sitting astride a motorcycle. "Before Hartmut, industrial designers didn't know how to promote themselves," says Robert Brunner, a partner at Pentagram. "This profession needs icons, and he has definitely been one."
Now he's a much wealthier icon, to boot. While frog's Aug. 3 press release said only that it had taken an "equity investment" from contract manufacturer Flextronics (FLEX ), BusinessWeek has learned that frog has basically been acquired. Flextronics paid nearly $30 million for a majority share of the 170 person outfit, of which Esslinger and Roller own 93%. Flextronics has an option to buy the remainder in three years, say sources.
After 35 years as a private company, it's a surprisingly rich payday. Design firms -- especially ones that are so tied to one individual -- traditionally have limited market value. After all, they're worth very little if the creative talent walks out the door, and they're not big enough to weather cold spells for too long.
But frog's timing was excellent. After difficult years during the downturn, Esslinger says the company didn't need an influx of capital. "We're very profitable," he says. Net margins for design houses tend to be 20%-plus. And he says he has declined offers from numerous suitors of late. In fact, Roller, the other co-CEO, says she's still receiving phone calls from investment bankers who don't know that frog has already been sold.
All the interest is one reason Flextronics ultimately valued the company, which had 2003 revenues of around $35 million, at well over that rate, say insiders. That's a healthy multiple, since design firms traditionally have sold at one time their revenue rate. Roller says during the tech bust, frog got numerous bids to buy the beleagured firm for well below half its revenue. Now, though she won't confirm the figures, she says, "The valuation was clearly higher than we thought it would be -- and we could have got more."
So why sell to Flextronics, and why do so now? Some say it's because frog has lost its edge in recent years. Firms like IDEO have gone way beyond designing products to designing services and experiences -- to the point that they often end up competing with the likes of McKinsey & Co. And some say frog isn't even as competitive in straight-ahead product design. The company now gets roughly half its $35 million in annual sales from designing Web sites, software manuals, online branding campaigns, and the like.
"From a product-design perspective, they've kind of fallen off the radar," says Brunner. "We rarely run into them." Roller responds: "We got a good valuation based not on revenue, but on profitability. We're doing this deal at a time of extreme strength, which is why Flextronics was interested in us. So that kind of kills [the critics'] argument."
Esslinger denies that he's trying to get out while the getting is good. Rather, he says merging with Flextronics can help him flex frog's product-design muscles far more than in the past. "I don't deny the money is important," he says. "But suddenly, a bigger vision is possible. We were ahead of the curve when we started the company, and then a then a bunch of people copied what we did and began claiming that they were better than frog. That will never happen again. We're jumping ahead of the curve again."
WANTING TO STAND OUT.
Specifically, he says combining with Flextronics will create a unique soup-to-nuts product-development outsourcer. In recent years, a host of mostly Asian "original design manufacturers" have been designing brand-name products for Dell, Motorola (MOT ), IBM (IBM ), and many others. But they focus on designing the electronic guts of products -- not on creating a look and user experience that a customer can fall in love with.
The new Flextronics-backed frog could be a powerful new competitor. Flextronics is one of the world's largest contract manufacturers, with 82,000 employees and 12 million feet of factory space in 32 countries. Besides assembling products, it also has sophisticated logistics capabilities that let it efficiently procure billions of dollars worth of parts each year. Then there's a $200 million-a-year business designing digital cameras, PDAs, and other products for big brand-name customers.
With frog's industrial-design expertise, Flextronics CEO Michael Marks hopes to help his company make products that stand out among these me-too offerings. "Industrial-design firms care most about getting their good ideas out into the world," says a rival design shop's CEO. "Hopefully, frog can influence [Flextronics] to care more about the lovely bits they put into their designs -- and not compromise them away for cost reasons." By Peter Burrows
Esslinger can also help Flextronics land new customers. For example, frog has hooked up with Disney (DIS ) to design a line of consumer-electronics products for kids, including a phone, a walkie-talkie, and a PC with Mickey Mouse ears that was unveiled on Aug. 5. Disney thinks these products could be a $500 million business over time, says frog Chief Operating Officer Doreen Lorenzo -- and Flextronics could end up being the manufacturer of many of them.
Esslinger says such integrated offers will be the wave of the future. Just as products like Apple's elegant iPod are outselling far cheaper copycat digital music players, he believes customers will gravitate to products that resonate with them beyond the pocket book.
Indeed, collaboration between frog's designers and Flextronics' manufacturing specialists will help the company get a jump on what he says will be a future of "personalized production." Imagine going into your local cell-phone store. Instead of looking at a few shelves of existing models, none of which precisely match your needs, you would instead be able to design your product, with the color, features, and price you want (say, a simple $20 phone in purple, but with just one button to push). Or when you go shopping for a stereo, you could pick from a menu of offerings at a given price point. For $99, for example, you could get a feature-packed model with docking stations galore, or else a model designed to simply provide the best possible sound at that price.
MIX AND MATCH.
This is possible because factories have far more flexibility than most outfits are able to exploit, says Esslinger. Typically, original design manufacturers try to bring out as few products as possible to sell to the widest audience possible. Then armies of planes and trucks fill stores and distributor shelves around the world with inventory. The result, all too often, is reams of similar products that carry very low profit-margins, once the price wars have taken their toll.
Instead, Esslinger wants to develop an infrastructure of components -- say, a few dozen keyboards, enclosures, and other parts -- that are designed to be easily mixed-and-matched on the factory floor at little added cost. Manufacturers could then charge a premium for the more customized product and bring more profit to the bottom line.
"Today, it may only be cost-effective to make 10,000 units of a product. But that will go to 2000, and then to hundreds, and who knows, maybe then to 10," says Esslinger. "That's the challenge. It's not really about beauty or style. It's about uniqueness."
Certainly, he and Flextronics CEO Marks share big ambitions. "I think we can grow to $300 million to $400 million in three to four years," says Esslinger, from around $35 million in 2003. Combined with Flextronics' related design services, Marks says these activities "will be a $500 million business within two years."
The plan may sound good on paper, but implementing it won't be easy. frog is as techno-hip as they come, staffed by black-clothed designers from eclectic professional backgrounds. Flextronics is a vast operation, which makes pinching pennies a religion in plants from Mexico to China. "I think the creative types will leave frog," says one recent departee. Pentagram's Brunner says that's what happened when Flextronics bought Palo Alto Design in 1999. "[Palo Alto] was an up-and-coming design firm. Selling was good for them financially, but they basically disappeared from a design point of view," Brunner says.
Esslinger agrees that maintaining frog's culture once inside Flextronics is the toughest challenge. "We have to prove to ourselves that this makes us better. It will be hard work." But he thinks it will happen, because Flextronics seems to want frog to maintain its maverick ways. Marks says he will maintain the frog brand name, and Flextronics' handful of industrial designers will now report to Esslinger. Also, the composition of frog's board will be split: Esslinger and Roller from frog, and Marks and Flextronics design-services chief Duncan Robertson. Indeed, Marks says he chose not to buy all of frog, "because we want those guys to stay."
ROOM WITH A VIEW.
As for Esslinger, Marks figures he'll work another three or four years. Esslinger, who nearly quit in 2000 rather than slug it out through the downturn, won't give details, but insists he'll remain active. "This is the best job on earth, and I'm not good at golf."
But what about that big payday? "This isn't about the money," says Roller. Esslinger already is able to satisfy his lust for sports cars. He owns a souped-up Audi that weighs more than a ton and can go 190 mph, as well as a new yellow Porsche 911. "Patricia has never been jealous of anyone but my Porsche dealer," he laughs. He has even convinced her to allow him to put a glass wall in the living room of their home, so he can see into the garage.
He professes not even to know how much the firm pays him each year. Instead, he shrugs and nods toward his wife. "He has no idea," she laughs. "Unfortunately, he does have a credit card." So don't look for this tech industry legend to ride off into the sunset just yet. When the time comes, he says, "it won't be on horses. A Porsche, maybe."
Burrows is computer editor for BusinessWeek in the Silicon Valley bureau
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