Logitech Taking $100 Million Profit Hit From Google TV Mistakes, Chief Says

Logitech has “no plans to build another box” for Google TV, Logitech Guerrino De Luca, chairman and acting president, said Wednesday in a company webcast. De Luca called the company’s Revue set-top box, which came out last fall for the holiday season to enable HDMI-equipped TVs to receive Google TV, a “mistake of implementation of giant nature.” With the Revue box, “we thought we had invented sliced bread,” De Luca said. The company overbuilt “because we expected everybody to line up for Christmas and buy this box for $300,” he said. “That was a big mistake.” He said Google TV is a “great concept” and “has the potential to completely disrupt the living room” but that wasn’t the case when Logitech first offered the Revue, which he said launched with “software not complete” and “not tuned to what consumers wanted."

At the same time, De Luca said Logitech still wants to help Google establish Google TV “but with a significantly smaller and more prudent approach.” Google TV or “the child of Google TV or the grandchild of Google TV will happen,” he said. The integration of TV and the Internet is “inevitable” but the idea that it would happen overnight during Christmas 2010 “was very misguided” and “cost the company dearly,” he said. After the company dramatically cut the price of the box “to where we thought consumers valued it,” it’s now selling “fine,” he said. Logitech is on target to sell out of its Revue inventory by the end of fiscal 2012, which ends March 31, or sooner, he said.

De Luca referred to Revue boxes in the market as “ready to run Google 2.0” and said the company will complement the second version as it has with other platforms. But he added that “the jury is still out with Google TV 2.0.” Although he’s optimistic about Google TV in the second iteration, “We're not betting the company on it,” and Logitech plans to focus on other areas for growth.

De Luca’s comments on Revue and Google TV were part of a three-pronged stab at mistakes Logitech has made over the past couple of years, which De Luca said amounted to a “very bleak scorecard.” He also cited distribution issues in Europe involving new terms and conditions that affected its relationship with distributors and customers. He called the situation “complex” and said the company suffered as a result. The situation is improving, but “is not completely solved,” he said.

The third mistake the company was to pay less attention to the product portfolio than it should have, De Luca said. “Over the past 2-3 years we thought quantity could replace quality and didn’t fully understand what consumer behavior is at the point of sale,” he said. There haven’t been enough features to compel consumers to want to spend another $20 or so for a more advanced product, he said. “Because we were focusing on the living room and Google TV, there was an underlying opportunity cost there,” he said.

In the past, Logitech has had 10-15 “superstar” products, De Luca said, and today that number has dwindled to four or five. “Our obsession to get aggressive at the entry level and to get consumers at lower price points made us forget the key driver of Logitech’s success over 10 years,” which he said was to get consumers to buy more expensive products. “We have not paid attention to the up-sell proposition across a big portion of the product line,” he said. Developing a new product line with that strategy in mind will take time, he said. Most of the products will deliver in early fiscal 2013 in time for the holiday season. “By Christmas next year we'll have the product line we should have had 2 years ago but updated with the latest developments,” he said.

Logitech’s Harmony remote controls are an area where the company hasn’t been able to up-sell customers, he said. “People want Harmony,” he said, citing registration numbers, “but we have an abysmal product line up,” he said. “We're giving away the jewels at an incredibly low price point,” which has led to depressed profitability because consumers don’t have incentive to buy a step-up remote, he said. Future products will change that, he said. “It’s increasingly complicated to figure out what you want to watch,” he said, and that presents one opportunity for a premium feature, along with turning the remote into a “companion to help you navigate the complexity of content,” he said.

The direct cost of the first two mistakes De Luca cited is “well over $100 million at the operating income level,” and that excludes missed opportunity costs, De Luca said. By engaging a substantial part of the engineering team to deliver Revue, “which was not an easy product to develop -- and we did a great job under the circumstances -- we obviously underinvested elsewhere,” he said.

Music is an area that Logitech has shortchanged, De Luca said, and it has now become one of the target growth areas along with consumer PC peripherals and the business market. The company had a few music products and did “reasonably well,” he said. “But we never realized how major and significant that opportunity was, so we under-invested.” Logitech announced Tuesday it added the 320-kbps MOG subscription music service to its Squeezebox music players, which owners will receive in a software update.

De Luca called recent industry reports about the tablet cannibalizing PC business unfounded. With a nod to Mark Twain, he said, “The reports of the death of the PC have been greatly exaggerated.” The PC will remain a productivity tool for activities such as writing, taxes and family budgeting, he said. That the consumer PC is still a source of “tremendous opportunity” is the biggest flaw in the way the company approached the market in the last 3 years, he said. Long-term growth and profitability will depend on how successful Logitech is with its refocused initiatives, he said.