RFID Profit - the Taboo Subject
Mar 15, 2006 Dr Peter Harrop
In any rapidly emerging market sector, there are those that make bold initiatives but miss their targets and there are those that quietly create profitable businesses. For those in trouble, the investment may become strategic. Post hoc rationalisation may be the order of the day. And the success stories may be kept quiet for fear of exciting competition. So it is with RFID, where many companies are reviewing their strategies after disappointment while others are succeeding. However, as far as the press and the analysts are concerned, profit is a taboo subject. Best not to annoy the clients by predicting that some approaches are almost certainly doomed to failure.
Laws of the marketplace apply
IDTechEx has recently researched the subject and it has taken a different view. Using many, well proven, "Laws of the marketplace" it finds that there is nothing peculiar about RFID. It is important to know where you are on the V curve of profitability versus sales for your market sector, what your experience curve teaches about the future, how your position versus competitors relates to your market sector growth and so on. Some examples of the position on the market growth/ competition matrix of the participants in certain RFID sectors are shown below. The purpose is to show which are potentially cash cows (mature market, dominant share), cash traps (mature markets, poor share), question marks (fast growing markets, poor share) and stars (fast growing markets, dominant share) and manage these businesses optimally with this in view.
Position of RFID suppliers to certain sectors, following the methodology of Boston Consulting Group.
RTLS=Real Time Locating Systems
Useful templates include
- What are you doing, that customers value and will pay for, but the competition either cannot or will not do?
- The lower cost competitor should enjoy higher and more stable profitability
- The most profitable companies long term are not run solely for profit. Certain types of investor therefore mean trouble.
- 80% of success is down to product positioning and only 20% to efficiency and luck
These excellent guidelines originate from the Boston Consulting Group, the Strategic Management Institute and other analysts. With these principles in view, IDTechEx has looked closely at over 20 consistently profitable company activities in RFID and profitability in the industry in general and at its detailed market forecasts for the next ten years. We have made the following conclusions.
The RFID industry often has the wrong priorities. Most of the 1000 RFID suppliers are offering lackluster products into slow growing markets that may be cash traps or at best modest earners.
The value chain is fragmenting when it needs to do the opposite, because there is not enough profit to share between the fragments.
The major customers need a small number of suppliers with global experience and support, yet the number of suppliers is rocketing with almost none of them genuinely operating globally in RFID. We have found only one company with a sustained and profitable major acquisition program consolidating the RFID industry to the delight of its customers. It is Assa Abloy, so far acquiring Metget, Sokymat, HID, Indala, Card Manufacturing Center of Excellence, ACG Identification Technology and Omnikey for their "Privacy and security business" with over $200 million in RFID sales yearly. Others have made more modest RFID forays that look promising but are not yet mature, such as Verichip Corporation merging two companies to create a small people tagging business.
Where profit is most frequently seen
Profitability of RFID operations can vary by market sector, tag frequency and position in the value chain but all this more directly relates to market positioning, not technology. This is in line with marketing theory. That said, there are a larger number and percentage of profitable RFID companies at the end of the value chain, as in system supply, system integration and facilities management. These activities also see larger average order size. This is reflected in appropriate action by a number of acquirers such as Assa Abloy, Linpac and Alien Technology that have added such companies to their previous capability which was earlier in the value chain. Others such as Hitachi have created a solution business internally (Mew Solutions) to add to their existing RFID business supplying RFID chips. We believe these companies are wise not to divest their "early in the value chain" businesses because they also have great potential and anyway the "Laws of the Marketplace" teach us that we must vertically integrate as markets mature.
Moths to a flame
In RFID, as in other business activities, profitability is not linked to size of market per se. Yet many are attracted to the largest markets like moths to a flame. Some will succeed, but only a very few. Legal push and mandates can inflate market size - as with livestock and with pallets and cases that consumer goods companies must tag for retailers regardless of economics. For RFID suppliers, that sounds like a license to print money. However, if customers are reluctant, prices can be tight and delays commonplace. Add technical problems and you have a blood bath. At least one profitable RFID company has become loss making at unplanned levels by participating.
Prospering in niches
Niche players with specialist technology and industry knowledge often prosper, particularly in undersupplied non-glamorous sectors and this is very true of RFID. Those who serve the well publicised, apparently large emerging markets, would sometimes do well not to follow the herd but perform a non glamorous support role. For example, the stellar profitable growth of AWID in interrogators is not yet matched by anyone supplying RFID labels or label parts into the retail sector. Heroic attempts to move towards making trillions of RFID labels are what hit the headlines, not interrogators. This reminds one of the adage, "In a gold rush, get there first and sell shovels". However, a closer look shows that modern EPC interrogators are highly sophisticated and very few companies can make them at the required price points.
Avoid the glamour
Indeed, many profitable RFID activities derive from success in markets that are themselves not glamorous, such as Alanco Technologies in tagging inmates of US and European correctional facilities, Savi Technology supplying the military and Allflex tagging pigs and cows. Thus the adage, "Where there's muck, there's money". The rejoinder of some is that they do not wish to have a small success. They wish to create a big business, like Symbol Technologies getting to $1.5 billion dollars from nothing in the barcode business.
Large niches really do exist
Some participants argue that "large niches" is an oxymoron. However, a closer look at the these large niches shows that Alanco sees over $1 billion potential for its form of RFID just in the top 500 high security prisons in the US and Savi Technology has just landed an order for $424.5 million dollars, the largest in the history of RFID and the equivalent of 8.5 billion five cent RFID labels for pallets and cases for retailers, and a far larger sum than retail goods suppliers will provide in a single order ever. Indeed, Savi's customers are keen to buy quality and pay for it. We are not saying that there will not be big winners in the pallet/ case tagging business - we are just saying that, for most, there are much richer pickings elsewhere.
Below we show just a few of the market sectors IDTechEx has examined for profitability. It is oversimplified of course. The full study revealed that relationships are complex and the larger markets are not necessarily prosperous, nor are the fast growing ones, but some certainly are.
Examples of the prevalence of profitable RFID activities and other market characteristics by applicational sector.
Source: IDTechEx RFID Knowledgebase www.rfidbase.com
Flying in the face of history
There has been a tendency for the credibility of suspect statements to be boosted by excessive repetition. One example is the forecast that the one cent tags needed for high volume item level tagging will be possible using silicon chips provided orders of at least hundreds of billions are forthcoming. Sadly, the experience curves of integrated circuit costs versus number ever made, over three decades give no support for this.
This brings us to the well known concept of disruptive technology. In management speak, it is a new technological innovation, product, or service that eventually overturns the existing technology despite being radically different. Initially, disruptive offerings often perform worse but they come to dominate an existing market by either filling a role that the older technology could not fill or by successively moving up-market through performance improvements until finally displacing the market incumbents. The RFID industry is currently dismissive of printed RFID because it is not ready, it is crude and it cannot meet the ever more complex specifications being written. However, sooner or later, someone will have to write a very simple specification for the biggest opportunity of all - item level RFID - and printed electronics is potentially cheapest of all, even printable on products. Printed RFID could be the big disruptive technology in RFID and none of the companies working on it are traditional RFID companies. That is classical behavior. Meanwhile, active RFID for RTLS that is parasitic on WiFi networks is showing some signs of being a disruptive technology in very different RFID markets, with companies such as AeroScout enjoying new and rapid growth.
Contentious but useful
Of course, all this is contentious. Some will argue that marketing theory is sometimes a poor guide to action and it should be ignored. Others may dispute our interpretation of the evidence. However, if we have encouraged debate, that should, in itself, be a good thing. In general, the RFID industry obeys the laws of the marketplace like everything else and closer attention to this can avoid many projects unnecessarily ending in tears.
The IDTechEx results and its forecasts for RFID markets for the next ten years will be elaborated in the Masterclass How to Make Money out of RFID. This Masterclass will feature presentations from representatives of several consistently profitable RFID companies, sharing their secrets of success.
To learn more, attend the key industry event where we air these issues - hear big opportunitites from large "niche" markets, with best coverage of new technologies. Attend RFID Smart Labels USA 2006 March 28-29, Boston and learn from GE, LG, Electrolux, British Airways. TNT Logistics, US DoD, P&G/Gillette, Rexam, Smurfit-Stone, Crown Holdings and many more. Now with delegates from 28 countries! www.smartlabelsusa.com
To read more see new IDTechEx research:
Attend Printed Electronics Europe Cambridge UK April 20-21 www.printelec.com .