Logitech (NASDAQ:LOGI) was once a celebrated manufacturer of PC peripherals, shipping more than one billion mice since its founding in 1981 and earning a reputation for product quality and innovation. Now, the company finds itself in the midst of a turnaround. The sagging health of the PC industry has dragged down Logitech performance the past few years, but CEO Bracken Darrell believes the exploding markets of smartphones and tablets can revive the company. With guidance recently raised to $2.1B, the results so far are encouraging. While there is much reason to question whether Logitech can negotiate the transition to mobile devices, there is also plenty of reason for optimism.
Netscape co-founder and venture capitalist, Marc Andreessen, is famous for proclaiming that, "software will eat the world." A potential corollary of his thesis is smartphones and tablets will eat hardware. Smartphones have effectively killed single-purpose electronics like digital cameras and GPS devices, and the growing functionality of mobile devices only promises the rampage will continue. In the wake of these deaths, however, opportunities will blossom to deconstruct single-purpose products and reassemble them with smartphones and tablets supplying the brains and the screen.
Logitech at its core has empowered people to interact more naturally and more comfortably with electronic devices. Because the generalized nature of mobile devices constrains them to be jacks-of-all-trades, not masters-of-one, optimizing for specific uses will require peripherals. This is the broad opportunity for Logitech, especially in mobile gaming and business peripherals.
Mice and keyboards drive 51% of Logitech revenue today, illustrating the dangerous dependence on desktops and laptops, but Darrell hopes game controllers for mobile devices can fortify this vulnerability. Analysts forecast 5B smartphones and 407M tablets by 2017. Assuming 1% - 5% of users care enough to augment their gaming experience with dedicated controllers, the market could balloon to 54M - 270M devices worth $1.62B - $8.1B1. A meaningful percentage of the market could boost sales in a material way for Logitech.
The struggles of the Nintendo WII U and the Sony PlayStation Vita (NYSE:SNE) reveal the flagging demand for handheld consoles, a product increasingly rendered obsolete by the entertainment capabilities of smartphones and tablets. Touch devices can replicate the processing power and the rich graphics of handheld consoles. While Nintendo and Sony boast beloved game characters and franchises, new developers like Rovio, the creators of Angry Birds, are gradually eroding this advantage as well.
The tactile, more immersive experience afforded by specialized buttons and directional pads offer one tangible benefit of handheld consoles. While most mobile games like Angry Birds and Temple Run are optimized for touch and do not need extra hardware, there is no doubt some games could provide a fuller, more fun experience with supplementary controls.
Until recently, Apple (NASDAQ:AAPL) shackled developers to operate under touch-only constraints. Support for game controllers was announced in the summer of 2013 and was received with great fanfare. Developers can finally unleash their creativity and launch mobile games customized for game controllers, wiping out one of the last pillars sustaining handheld consoles - and in the process spawning demand for products like the PowerShell by Logitech.
The rising BYOD trend, where employees use personal devices at work, presents exciting possibilities for Logitech. As smartphones and tablets encroach deeper into the enterprise, business devices like desk phones and conference systems will slide deeper into irrelevance. The intelligence within these products will migrate to their general-purpose attackers, leaving peripheral makers to tightly integrate with mobile devices and create more desirable workflows for business activities like phone calls. For instance, power callers may welcome a wireless headset that opens the phone app or answers calls upon getting lifted up. Or they may prefer dedicated number pads tailored for faster dialing, capable of initiating calls without any interaction on the mobile device - or possibly an accessory combining both.
Besides replacing existing equipment, there will also be chances to craft new models of interaction within the office. Powered by tablets or set-top boxes like Apple TV, wall-mounted monitors for example can morph into electronic whiteboards. Logitech could enable users to draw on, and interact with, these virtual boards through a wireless pointing device, functioning much like a mouse but reimagined for this context.
Given the embryonic state of smartphones and tablets in the enterprise, it is difficult to accurately estimate the market size and disruption potential of business peripherals. Corporations, however, spend tens of billions spend annually to boost productivity, and it seems reasonable to expect the space will grow into an attractively sizable one. Competition, naturally, will be fierce as incumbents like Polycom, Cisco (NASDAQ:CSCO), and Plantronics will not easily surrender. The advantage for Logitech is the freedom to start fresh, optimizing for the new world of tablets and smartphones without the burden of legacy products and customers.
1. Assumes current ASPs of ~$70 will hold.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.