In the highly competitive consumer communications market, companies that can offer customised and unique services, made easier through partnerships or vertical integration will have a competitive advantage. On this premise, Phillips Electronics NV and Lucent Technologies created Phillips Consumer Communications (PCC). Although the magnitude and swiftness of the merger had raised concern for its competitors, PCC still envisages fierce competition. This new giant will truly change the game at an accelerated pace, and aim to emerge as the new king.
On October 1st, Phillips Electronics NV and Lucent Technologies announced the 'official' launch of the two companies' new joint venture, Phillips Consumer Communications (PCC). It marked the completion of the merger, initiated in June, of the two companies' consumer communications products businesses, which include a full range of corded and cordless telephones, answering machines, analog and digital wireless telephones, and pagers. Phillips Electronics will maintain a controlling 60% ownership stake in the announced company. October's announcement has been endorsed by Wall Street, and has resulted in a significant increase in the share prices for both Lucent and Phillips. Phillips Consumer Communications can now leverage the use of the following combined resources as it tackles global consumer communications markets. The new giant has an annual revenue base of roughly US$ 2.5 billion, a staff of 12,500, a distribution network of 42,000 retail outlets worldwide, and a portfolio of products that includes corded and cordless telephones, answering machines, analogue and digital cellular/Personal Communications Services (PCS) telephones, and pagers. Changing the game From the date of the original June announcement to the completion of the merger, PCC's aggressive manoeuvring to combine the consumer communications resources of both companies has attracted keen interest form the world's leading manufacturers of cellular telephones, such as Motorola, Nokia and Ericsson. It is not only the magnitude of the merger that has raised concern for its competitors, but also the synergies created and the swiftness with which PCC has begun to integrate the two companies' resources. Within a week of the merger announcement, PCC had appointed its Chief Executive. For Lucent, the creation of the joint venture allows it to focus on the wireless infrastructure business, while exploiting the extensive sales, marketing and distribution capabilities of a global consumer products organisation. Phillips' consumer know- how will be a particularly important asset to Lucent with the growing trend toward the distribution of wireless telephones on the retail level. It will give Lucent access to a wide range of handsets to support its digital cellular/ PCS infrastructure portfolio of GSM, CDMA, and TDMA. In addition, Lucent should also be able to exploit Phillips' solid presence in markets where the US vendor has traditionally been weak, including Europe and Latin America. Despite all the good news, PCC will encounter some hurdles. The company faces fierce competition in wireless terminal markets worldwide from giants Motorola and Nokia, and increasingly from Ericsson. What is at stake in emerging markets are lucrative cellular, PCS and paging subscriber set markets. Even though Phillips has great brand recognition in other consumer segments (from televisions to electric shavers), it still needs to establish itself in the wireless telephones and pagers sector. Phillips' job will certainly be made more difficult in the US where Lucent has marketed products under both AT&T and Lucent brands. Overall, this new giant will truly change the game at an accelerated pace, and some years from now the entire consumer communications landscape may have a new king. The new Chief Exeuctive Officer, Michael McTighe (a former managing director of Phillips Electronics Consumer Communications unit), began integrating the two companies' consumer communications groups. Subsequently, in September, PCC introduced the company's first five wireless telephones at the PCS '97 exhibition/conference held in Dallas, Texas. Phillips has strong brand recognition in a wide range of consumer products which are responsible for the largest portion of total revenues for the company from products sold in Europe and Latin America. The company is also beginning to emerge as a leader in Asia. Prior to the creation of PCC, Phillips' product portfolio included corded and cordless telephones for a variety of systems such as Digital Enhanced Cordless Telecommunication (DECT), Global system for Mobile Communications (GSM), Advanced Mobile Phone Service (AMPS) etc. and paging gear. Lucent's core competencies centre on public, wireless and private telecommunications systems, and communications software. Meanwhile, Lucent has a portfolio of consumer communications products which has largely been limited to a presence in the US cordless telephone, corded telephone, answering machine, and Time Division Multiple Access (TDMA) and Code Division Multiple Access (CDMA) cellular/PCS telephone markets. Overall, the creation of PCC bodes well for both Lucent and Phillips. In the migration to digital cellular/PCS technologies, more companies have entered the wireless telephone business, including cellular/PCS infrastructure vendors, and new entrants such as Japanese and Korean manufacturers. In this highly competitive environment, those handset manufacturers that are able to offer customised/unique service solutions will win out. Because the effort of developing new services is made easier through partnerships or vertical integration (handset and infrastructure vendors), those companies that have established relationships or are able to produce bundled infrastructure/handset will have a competitive advantage. Conclusion For Phillips, the merger gives the European company access to a Lucent stronghold, the lucrative and high-growth US wireless terminal market. In addition, it will also give Phillips access to one of the most competitive technology segments, CDMA. This should give PCC an edge in bundled deliveries and in the development of specialised/customised features. PCC will immediately gain access to Lucent's strong presence in cordless telephone markets in the US where it has nearly 25% of the market.