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Logitech International S.A. (LOGI)Stock (Computer Peripherals Industry)
 The growing popularity of notebook computers have negatively impacted Logitech's sales of OEM mice and keyboards because laptops do not require these devices. Additionally, an increasing number of laptops are being made with built-in webcams. While Logitech makes some of the webcams embedded into new laptops, it is not a significant part of their revenue, and the margins are much lower than on retail webcams. In the year ending April 2008, retail video sales, of which webcams are the largest component, were down 24%.[3] Moreover, in 2006, Microsoft (MSFT), entered into the webcam business, completing its line of peripherals, which also includes mice and keyboards. In addition to having greater financial resources, Microsoft also has the advantage of existing relationships with OEMs since its software is used in most PCs and laptops sold around the world. [edit] Business FinancialsLogitech's annual growth in revenue over each of the past five years has remained very stable around 15%. For FY2008, the spike in revenue growth was result of an increase in popularity of the company's Harmony universal remote controls. Additionally, the new line of high-end diNovo keyboards and MX and VX Revolution mice brought rave reviews, immense popularity among consumers, and higher margins (represented by the company posting higher operating margins in FY2008 than in any of the past five years). As can be seen in the breakdown of revenue by product category, relatively similar and constant growth has been achieved in each category, except in Retail Video (i.e. webcams), which underwent a 25% drop in sales in FY2008. However, a surge in popularity of universal remote controls (35% increase in category revenue) more than made up for a weak webcam market. Most of Logitech's revenue comes from its original business of computer mice and keyboards. The company's computer speaker business makes up the next largest part of revenues. Approximately half of Logitech's revenue has come from Europe, while the North American and Asia/Pacific regions account for 35% and 15% of revenue, respectively. Logitech hopes to expand significantly into Latin America, Eastern Europe, and China, where consumer electronics markets are rapidly expanding. For instance, in China, sales volume of notebook PCs grew 44% in 2007.[9] China's PC penetration is only 111 computers per 1,000 people. In comparison, the US has 850 PCs per 1,000 people.[10] [edit] Key Trends and Forces[edit] Declining popularity of desktops vs laptops negatively affects Logitech's OEM salesLaptops have built-in keyboards and trackpads (which are mouse alternatives built into laptops), so end-users of laptops do not have the same need for Logitech's mice and keyboards as do customers buying desktop computers. As laptops grow even more in popularity, Logitech expects that its sales of OEM-branded mice and keyboards will decline. Logitech has already observed a slowing of OEM-branded mouse sales, which historically made up the bulk of total OEM sales.[13] In 2007, desktops still outsold notebooks, but the margin has been tightening steadily due to the price declines in the market for notebooks and the growing availability of wireless Internet (and thus the growing value of owning a notebook).[14] In Q1 2008, laptops outsold desktops in the U.S. and analysts at IDC expect this trend to broaden to the global market by 2009.[15] [edit] Growing use of PC-based VoIP services will increase demand for webcam productsThe webcam market was worth $1.2B in 2006, and WinterGreen Research expects it to grow to $6.2B by 2013[16] , it is uncertain whether this demand will be satisfied by OEM-embedded webcams or aftermarket USB webcams. Lastly, the growing market for webcams has led competitors to enter the market, such as Microsoft (MSFT), which started producing webcams in late 2006. [edit] The growing popularity of laptops with built-in webcams is hurting Logitech's external, retail webcam businessThese days, even low-end laptops such as Intel's Netbooks, which will cost between $250-$350, sport built-in webcams.[17] Although Logitech produces some of these OEM embedded webcams, it is not a significant part of their revenue, and the margins are substantially lower than on the previously-popular external, retail webcams that made up a large part of Logitech's business. As more laptop models become available with built-in webcams, and as users migrate from desktop to laptop purchases (see "Declining popularity of desktops vs laptops negatively affects Logitech's OEM sales"), Logitech will lose important businesses in the external web cam market. Already, Logitech has noticed a decrease in webcam sales; in the year ending April 2008, retail video sales were down 24%.[18] [edit] Logitech has invested heavily in products aimed at users of computers as a digital media hubConsumer media servers have been quickly growing in popularity, and Logitech has been investing in products targeted at users of these servers. A media server is an electronic device (usually a personal computer loaded with special software) that serves digital media such as digital music or videos to televisions, computers, and speakers located around a consumer's house, usually in the living room. ABI Research predicts the number of PC media servers to grow worldwide to 25 million by 2013.[19]. For example, Logitech purchased Slim Devices for $20M in 2006.[20] Slim Devices' products stream digital media around the house, but this is only useful if consumers own digital media content. Within Logitech's core business, wireless keyboards and mice face strong future demand from media center setups. For instance, the MX Air, which works very well with media servers because it can be used without a surface like a desktop. Even Logitech's high-end speaker line has a high dependency on consumers' ability to play high-quality content on these products. Fortunately for Logitech, there is a clear trend, for Digital Media Distribution with decreasing costs and increasing availability and quality. Apple (AAPL)'s iTunes Music Store has sold over 5 billion songs[21] and has expanded its offerings into television shows and movie rentals. DVD-by-mail service Netflix (NFLX) has started offering instant viewing of a limited part of its library via internet. Sales of physical media are in sharp decline: revenue from sales of CDs and DVDs fell 13% in 2008.[22] As the computer becomes the central hub for digital media content, consumers will seek solutions for streaming this media around the house, controlling the equipment with universal remote controls, accessing the server by means of wireless keyboards and mice, and playing back digital content on speakers that connect to computers. Logitech services all of these areas and more (such as the security video camera market), so it stands to benefit from this trend. [edit] CompetitionIn 2007, Logitech had the largest market share in the input device market (i.e. mice and keyboards), the computer speaker market, and the computer headset market.[23]
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