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TechAltar
The Death of Europe's Last Electronics Giant
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In 2010, the CEO of Philips proudly announced to the media that quote, we are no longer a high-tech company. Not a sentence that you'd expect to hear voluntarily from a company that just a decade earlier was every bit as much of a giant and an innovator as Samsung or Sony, and until recently was the third largest electronics company in the whole world, with over 350,000 employees at its peak. But this statement was true, and intentional.
The company that once dominated whole industries from lighting to radio, the company that invented or co-invented almost every major physical media format from the compact cassette to the CD, the DVD and the Blu-ray, and the company that arguably birthed much of the semiconductor industry, including giants like ASML and Taiwan's TSMC as well, that company has indeed become an insignificant shell of its former self by the 2010s. From the outside, Philips still seems like kind of an electronics giant.
Just in my life, I have Philips Hue lights all over our studio, a Philips vacuum cleaner at home, a Philips electric razor for trimming my beard, and a Philips Ambilight TV in my parents' place, while elsewhere, Philips branded monitors, DVD players, loudspeakers, radios, coffee machines, and more are still pretty common too. But this strength is mostly an illusion. The company makes almost none of the products that it's known for today, and I don't just mean that they're outsourcing their manufacturing.
From lighting to TV to domestic appliances, the company has given up on the whole electronics industry and has sold its business piece by piece to competitors, mostly in Asia, and then they just sold those companies the rights to keep using their brand too. The only two consumer-facing product lines that Philips still has today are razors and oral hygiene products like electric toothbrushes, which together make up only about 15% of its business, which in total is now less than a tenth of the size of a current electronics giant like Samsung.
It is fitting then that Philips dropped Electronics from its name officially in 2013, and together with their other blunders, like their complete failure in the semiconductor industry as well, the statement of this no longer being a high-tech company seems oddly accurate. So this is the sad story of how decades of mismanagement and failed innovation made Europe's last electronics giant kind of irrelevant. This video was sponsored by my streaming service Nebula and my very own podcast that I've been wanting to launch for years. More about that at the end of the video. Philips was founded in 1891 by the Philips family, and over these 130 years, the company has developed five very significant business units, each with a lasting legacy.
As its logo indicates, the first business unit which the company got its start with was lighting, where they made things such as light bulbs. Philips slowly built its way to the top of this market by combining solid product quality with great marketing and aggressive business practices as well. In 1925, for example, Philips became part of the now infamous Fabis cartel, together with competitors like General Electric and Germany's Ostrom and a few others, where the various companies agreed to come together and artificially increase prices, while also lowering useful lifespans of light bulbs to a maximum of 1000 hours.
These companies basically invented planned obsolescence, and while the cartel was dissolved around the Second World War, Philips continued to grow steadily and became the largest producer of lighting products worldwide. The business remained relatively solid until the 2000s, when LED technologies fundamentally upset the economics of the industry, and Philips decided that they'd be better off just separating their whole lighting division into an independent company than they would be by figuring out how to bring it back to profitability. This is a practice that you'll see quite often from the company, and so in 2016, Signify was born as a new and independent company that carried on Philips' lighting business.
And since its independence, it has significantly outperformed its parent, Philips, that so desperately wanted to offload it, due to finding new major success in connected lights and the Internet of Things. Either way, Philips in the early days used the originally profitable business of light bulbs in 1914 to finance their so-called Philips Physics Laboratory, an extremely ambitious, dedicated research organization that acted much like the legendary Xerox PARC or AT&T's Bell Laboratories. With generous funding and thousands of the world's best scientists, including even occasionally visiting Albert Einstein, they developed many fundamental scientific breakthroughs, including the cornerstones of modern radio technology. This research formed Philips' second successful product category, which also happens to be visible in the company's logo.
These waves likely symbolize radio waves or sound waves, and once they invented and patented things like new transmitters, which could carry radio waves around the entire globe, Philips launched its own radio station in 1927, connecting the Netherlands to its colonies across the world, and the company also became the largest supplier of radios in the whole world just three years later. Then, off the strength of their radio business, they expanded even further into adjacent categories, creating for example the compact cassette, the first ultra-successful physical media format for music and speech, an especially good fit for their radio business. And Philips struck gold with this.
Not only did they get to make cassette players and cassettes themselves, but also if anybody else made either, they got a license payment, and they kickstarted the whole modern mass music industry. So that was a huge deal, but after this initial success, cracks started appearing in the company's innovation. They practically invented the CD as well, but were hesitant to commercialize it, as they knew that that would cannibalize their existing cassette business, and so in their hesitation, Sony caught up with them, and then Philips ended up having to share the format with the Japanese giant.
And while that was still a huge success, their role in the next format, the DVD, was even smaller, while for the Blu-ray, they took a clear backseat behind Sony, despite contributing many of its innovations themselves. So Philips gradually fell behind, in part because they were too slow to keep up with the competition, but in part also because they bet on the wrong technologies multiple times. Like Video 2000, an unsuccessful competitor from Philips to the VHS, or CDI, an interactive CD format that the company bet a billion dollars on just to lose it all. And even worse, the company was completely unable to adopt to media consumption trends past the physical media formats, like iPods, smartphones, music streaming, or even just Bluetooth headphones.
Philips was basically completely unable to keep up with this industry over time. Still, the company's third major business unit, Consumer Electronics, arguably evolved from the success of their audiovisual business. Following the example of their Japanese competitors, they adopted the conglomerate model, where a company builds a huge portfolio of products instead of focusing on any one particular thing. But for Philips, this massive expansion did not go well in the end. In some product categories, like Shavers, where they had unique inventions, such as their patented circular rotating blade system, they could create defensible and profitable product lines, but in most, Philips was just one of hundreds of brands competing over scraps.
Now, to be clear, their lack of success did not come from a lack of trying. They made big bets, they took huge risks, and they kept trying to innovate. Just usually into the wrong direction. For example, they developed their own computer line, but their machines often weren't compatible with industry standard software, so few people ended up buying them. Or they leaned heavily into web TVs, the idea that people would surf the internet and email from their TVs through a simplified user interface rather than from their full PC.
Which, again, flopped, and they even had a fairly innovative cell phone lineup, including this prototype that basically turned a regular cell phone into a quasi-touchscreen smartphone with one of the first ever 2G connections ever. Pretty wild, but again, nobody really bought their phones. These were costly mistakes, and they paint a picture of a company that liked solving hard technical problems, but completely lost touch with the realities of consumer expectations. Meanwhile, the relentless competition, primarily from Asia, drove the margins of just about every commodity electronics product close to zero as well. Philips made a ton of stuff, including lots of innovative stuff, but by the late 80s, increasingly, none of it made any money for the company.
Of the $137 billion in revenue that they made from electronics in this period, they only managed to keep 3. 7. That is a margin of only 2. 7% over a decade, a ratio that would be pitifully low even for contract manufacturers like Foxconn, let alone for the likes of Sony and Samsung, who typically have margins around 10 or maybe 20%. So after multiple painful defeats, Philips essentially decided to completely give up on electronics and on risky innovations as well. This is where the quote from the beginning of the video comes from, and also the time period when Philips decided to offload all of their electronics businesses too.
In 2001, they disbanded their famous research lab, in 2012, they sold their TV and monitor business to a Hong Kong-based company called TP Vision, a year later they sold their audiovisual business to a Japanese company called Funai, and finally in 2021, Philips sold its last major electronics business unit in the form of its domestic appliances division that made things like vacuum cleaners and coffee machines too. They officially exited the electronics industry. And now, while that is sad, an even more disappointing story comes from the company's fourth massive business unit, semiconductors. The public probably doesn't remember Philips as a semiconductor company these days, but they absolutely were a massive pioneer in this field.
They started in 1953, primarily by developing components for their own electronic devices, and then they quietly grew, including with major acquisitions, until they became the second largest semiconductor company in the whole world. But while they had success at first, they started suffering similar problems with semiconductors, as they did with electronics around the 80s and 90s, such as making a big and failed bet on a new technology called SRAM memory, which cost the company a billion dollars, again, as well as generally poor management in a very difficult and fluctuating market. So Philips' whole semiconductor business was sold off and became an independent company in 2006, which is now known as NXP.
NXP mostly focuses on designing and manufacturing specialized chips for cars and industrial applications, and free of their parents' companies' poor decision-making, NXP became a much more successful company that actually managed to overtake its former parent. As of today, NXP is worth about four times as much as Philips, and it is much more profitable as well. Ouch. But even more mind-boggling than NXP is that Philips essentially kickstarted both of the world's two most important semiconductor companies today, TSMC and ASML. ASML, the only company in the world that can make the most important machines for chip production, is today worth $266 billion, or about 15 times as much as Philips, and it is Europe's most valuable technology company by far.
And it was Philips who started it together with another firm called ASM in 1984. Their focus on lithography, or the process of using light to transfer chip designs onto silicon wafers, meant that Philips, the largest lighting company in the world with a sizable semiconductor business, was very well positioned to compete in this field. But as development took longer than expected and the market was kind of rough in those years, both of the founding companies decided to largely give up on the venture and they sold it off to become an independent entity after just four years of operations. And this was done as part of the fifth major restructuring that Philips went through in those two decades.
What a chaotic business. And as for TSMC, I've already made a whole dedicated video about them, which you should watch if you haven't seen it yet, but long story short, the Taiwanese giant is currently the world's second most valuable chip company and is absolutely dominating the manufacturing side of the industry. The company had a rough start early on, struggling to find investors initially, and Philips was the only private company willing to take a chance on them. In 1986, the Dutch company helped TSMC get off the ground with money, key technologies, and of course access to ASML as well, and in exchange, it got a 27. 5% share in the new venture.
Given TSMC's current valuation, that stake alone would be worth $121 billion today, or about seven times as much as all of what remains of Philips combined. But just like with ASML and NXP, the Dutch giant exited its position and sold its shares early. In other words, Philips partially birthed the modern semiconductor industry and they managed to incubate three of the world's most important chip companies, and yet they captured very little of the value that they created. How incredibly frustrating. And Philips' fifth and final big industry was healthcare tech. They got serious about this sector relatively late, especially in the 2000s, and the company found success primarily in imaging. MRI machines, CT machines, etc.
Philips found that with an aging population, this industry was seeing steady growth, with safety and reliability being a concern, price competition wasn't nearly as aggressive, with heavy regulatory protections, there isn't as much competition, and this industry is also less cyclical than semiconductors or consumer electronics too. This is a significantly smaller business than all of the other stuff that they were doing in the past, but it's a much more comfortable one, especially for a European brand with a long heritage and good government relations, so Philips decided to focus on this completely. Today, Philips sees itself primarily and completely as a health tech company.
On the one hand, this is kind of a good thing, it gives them a clear focus at least, which might end up being a real benefit, but on the other, their actual performance here has been mediocre too, including having a massive recall just recently, and even in this field, their comfortable position might not be safe forever.
The company itself notes that new trends like telemedicine or AI-powered diagnosis and more all threaten to bring a fundamental shakeup of this industry eventually too, and while Philips now at least once again invests a fairly ambitious 9-10% of its revenue into R&D, it is far from certain that that will be enough so that they don't oversleep whatever the next revolution in healthcare is, just like they have overslept similar changes in the music, semiconductor or electronics industries in the past too. So Philips had it all and lost it all. This is a company that brought incredible innovations to the market and then fell on its face again and again.
It failed to build successful defensible electronics products like Apple's iPhone or Sony's PlayStation, leaving them to fight over scraps in an increasingly ruthless market. It failed to build a successful chip business unlike its competitors like Samsung and Sony, and it failed to adapt to changing consumer preferences like those in the music industry again and again. Two. Quite a tragic collapse. So that's sad, but I actually also have some good news. Next, I'd like to talk about my brand new podcast called The Friday Chillout.
After years of wanting to have a podcast of my own, we now have a weekly discussion with my researcher and writer Tristan, where we can go a little bit more in-depth on our thoughts on the technology industry, where we can discuss things like recent market reports or new technologies that we're particularly excited about, like Apple's upcoming non-invasive blood glucose monitor, for example. I don't like podcasts where people ramble on about their private lives forever, so instead in our podcast, we jump straight to the analysis, and we also have a mail back section where we finally get to have a real conversation with our audience. There is both an audio and a video version in the podcast.
I love doing both, and we've done five episodes already, and the feedback has been phenomenal so far. And here's the deal, an ad-supported model for a podcast of our size simply doesn't make sense, so instead of trying to jam ads into the free version of the podcast anyway, we decided to have the entire thing funded by Nebula subscribers like you. And here's how that works. Nebula subscribers get the show early on Friday, and the video version is exclusive to them as well, as a thank you for the support. Meanwhile, everyone else gets the audio-only version on Saturdays.
You can check out all of the versions down in the description, and the next episode should be out very soon too. I would literally not know how to finance this podcast if it wasn't for Nebula subscribers, so if you enjoy it and if you want to keep listening to it months and even years from now, then please consider using my link down in the description to sign up. With my link, you actually get a $20 discount on yearly plans now too, so it costs less than $3 a month, and that money goes directly towards supporting us and other creators that you might watch on the platform as well.
Nebula is of course our very own video and podcast streaming service that I and many of YouTube's smartest educational creators have built together, and your subscriptions have already funded many of my projects in the past too. That includes a whole class that I recently released on Nebula about my end-to-end video making process, which is available through the new Nebula Classes platform, as well as a whole original series called Technorama, with 8 full episodes of film analysis and tons of bonus videos as well. So check those out, be sure to use my link so they know that I sent you, I hope you enjoy everything, and I'll see you in the next one. .
S K R Y B O T
Skrybot. 2023, Video transcriptions from YouTube
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