Article

Look out, folks: A big fish might get you

Our industry continues to swim on the backs of ever more small, independent companies, and they are a potentially tasty morsel for some big fish yet to thrust forth from the deep. Is your company ready?

April 4, 2004 by

KIOSKmarketplace.comwelcomes the submission of significant insights from kiosk industry leaders. The writer of this commentary is the president and CEO of METALfx.

Time was, a hometown newspaper was a hometown newspaper. Everyone in the building shared the community -from the gentlemen upstairs whose hands smelled of expensive cigars all the way down the elevator shaft to the guys whose fingernails reeked of ink and oil-and everyone had a stake in how well the paper did in covering its beat.

Then a funny thing happened. A bean-counter looked at all those paychecks going out to reporters and critics and editorial writers and he read their copy. Then he grabbed another newspaper from another town and read virtually the same copy, just written by reporters and critics and editorial writers with different names. An idea was born, and soon careers and independent businesses were dying. Gannett. Knight-Ridder. The New York Times Company. In publishing, the Age of Monoliths had begun.

Business creatures, like most phenomena of nature, start small. Enterprises stumble forth from the primordial soup of ingenuity, battle against the beast whose domain is the status quo, and maybe, just maybe, will make a go of it. But that's not enough, especially these days. If nature teaches us anything, there is always a bigger fish out there. A stronger lion. A man with a meaner punch. There is power in numbers, the old saw says. And sometimes the only way to avoid being someone's dinner is to become too big to fit into his mouth.

And so it is now for the players in the kiosk industry. And over the few months and years, we're going to see the consequences-good and bad-of several defining attributes. Where We Are Today

We are too fragmented, with too many profit centers. In the industry today there are far too many players with their finger in the pie. To build a kiosk today, you will pay at least three separate individual cost centers in the act of building that kiosk solution: The design firm, the enclosure manufacturer, and the software firm to make it all come together. Although we are already seeing aggregators, like KIS, and Olea, and METALfx, ultimately we will see an investment banker come in and join all the pieces into one house.

We lack multiple one-stop solution providers. We deal with more individual component providers then we deal with complete solutions providers in every facet of the kiosk industry. Example - there are far too many printer companies that don't supply the paper that fits their own units. The same printer people don't even sell the cables that interface between their printer and the PC that runs the kiosk, parallel cables as well as the power supplies.

No one has economies of scale. Although we are looking at larger kiosk runs coming to fruition, none of us has really achieved the kind of purchasing power that will be a true barrier to market entry. We still see people extending 500-piece pricing to customers, in the hope that we will someday achieve those kinds of numbers, with some kind of a regularity.

Quite honestly, the first company to achieve the economies of scale demanded, in a similar fashion to that of Dell or even to what Wal-Mart, has achieved in their marketplace, will quickly take control of the kiosk marketplace. At this point, no one has the ability, like a Wal-Mart, to dictate pricing to their suppliers. When someone achieves this, we will see the prices of the components that are still out of line price-wise, like the price of thermal printers, start to come down to reality. The price of the specialized kiosk component will come more inline with the rest of the PC component that operates the machine.

We lack commoditization. Although there is profit in new design services and customization, there are true dollars to be made in the homogenization of the kiosk, especially for the manufacturer. Small runs for the manufacturer usually cost money to be spent that may have not been foreseen by the designer. Traditional set-up fees, non-recurring engineering charges, and tooling are cost centers for the manufacturer on small runs. Cost centers that are not always remunerated when the project doesn't go big.

Rolling It Up

Where do these circumstances leave us? No place less than at the precipice of revolution.

Several years ago, the automotive supply base was in a similar state, and many parallels can be drawn from many small suppliers to the evolution of Delphi, Lear, Johnson Controls, and others. In the 1980s, the automotive industry had lots of small suppliers that provided one, or a few parts to the car manufacturer. The car manufacturers would buy all the little parts and brought the parts into the mega factory and assembled the seats themselves. Lear and Johnson Controls, seeing the opportunity to aggregate this process, bought up a lot of these small parts suppliers and brought all of them into their house and started a first-tier manufacturer turn-key seat solution.

Later, Lear and Johnson expanded their turn-key operations to include the entire interior of the vehicle. Now Johnson Controls and Lear have staff working inside the car company facilities, working hand-in-hand with the engineers and designers of the vehicles themselves.

The same aggregation of a solution, like the one Lear and Johnson Controls pioneered, allows the Delphi company to provide a nearly complete chassis solution to General Motors.

Growth, economies, specialization.Once you have aggregated a solution, it can be specialized to fit an exact need in any industry. Currently, in the kiosk industry we see this specialization occurring. For example, Kinetics has specialized on serving the airline and travel industry. Netstop has specialized in the secure browser/cyber café industry and seems to be getting stronger with each passing day. The company has form and definition on what it does and whom exactly it serves.

Turn-key specialists will be the prime candidates of large investment bankers who will ultimately come into this industry looking to roll up the best-of-breed providers. We suspect that even the largest providers in our industry will experience a change of ownership so they can compete when big money starts flowing into this industry. WebRaiser, METALfx, and maybe a design firm like ExhibitMAX would be good fits for a vertical roll-up in the not too distant future.

Quality will improve. Once specialization occurs, and the kiosk becomes more standardized like a commodity, the quality will follow suit and improve. The aggregator, who can design, build and service 1000 units a month will see large leaps in the learning curve in finding the things that make kiosks work, and work even better then they do today.

Cost will be reduced. As standardization takes place the price of materials and labor, and the learning curve will fall exponentially. It is a law of manufacturing. Whoever achieves these things first will have the greatest advantage over any possible competition.

Speed to market will increase with more standardization, including software.We gain insight and expertise on a daily basis, on how to improve manufacturing processes. The unit we ship next week or next year will be smarter, faster and stronger all across the board. Not just better in components, but in design, functionality and in the manufacturability of the enclosure itself. Aesthetics and functionality will ultimately find a place together and we will move further away from the days of the square black box kiosk.

Once these things happen, this accrued expertise and experience will allow much faster arrival of new product to the marketplace. Soon, software kernels will be used across applications, bringing shorter lead times on new functionality of software. Job orders and manufacturing processes can be pushed forward to make manufacturing more streamlined. Good design ideas can be applied to the next REV or next generation unit.

Independent sales rep firms will evolve in specialty markets. Much like the military contractor who hires retired military personnel to sell back into the industry as a former insider with connections, you will start to see the same types of things happen in the kiosk compatible industries, such as the hospitality industry, the retail industry and everything that has a need for kiosks that has strong intra-industry trade associations. Beyond that, marketing companies and ad agencies will see the benefit of adding the kiosk as part of their product offering to these same type industries, who reach outside to subcontract marketing and visual expertise from such third party marketing firms.

Specialty service companies will evolve. One of our biggest customers has found that not only can they sell the original equipment butthey can build a business on services based on the needs of the unit. Right now the kiosk industry does not have one complete solution. IBM and NCR could do this now based on their histories, and their size. Once someone who can service everything that can handle the logistics sees that service is part of their package instead of something to be sub-contracted, that company will realize the kind of residual income that comes from the PC Printer market, where the true ongoing revenue of toner and ink are where the long term and greater profits are ultimately made.

What about the days after the roll-ups? A relatively few large mega suppliers will exist. Compare to hi tech supply change, Flextronics, Sanmina, Jabil. Everyone else will supply components as a commodity. Ultimately, there will be three maybe four major kiosk companies in the industry who will completely dominate the market. One or two will compete on cost and one or two will be the high end, niche market players like Kinetics is today.

The Mom and Pop software folks had better be really good at what they do to survive, and if they are that good they will have the opportunity to become part of the conglomerate that will value their offering, and add it into the mix.

Ultimately the faces will be the same, but the ownership structures and the money backing will come from sources that are not in the marketplace today.

Gordon Short has more than 25 years in the manufacturing sector, including 10 on progressive assignment with General Motors and 10 as EVP with a Japanese-owned, U.S.-based automotive components supplier. Five years ago, he became president and CEO of METALfx, a North California-based manufacturer that upon his arrival was almost exclusively an enclosure supplier to the high-tech industry and a contract manufacturer of arcade games. He has diversified METALfx's product base and driven the company to become a significant player in the kiosk market.