Royal Philips Sheds Old Businesses for New Directions

By ERIC A. TAUB

Published: December 25, 2008

BOSTON — Royal Philips Electronics, the Dutch industrial giant, is convinced of two things: the population is getting older and it is getting greener.

Those two trends are guiding the company as it continues to transform itself, reorganizing its divisions and jettisoning product lines while picking up others.

Long known in this country — when it’s not confused with the company that makes Phillips Milk of Magnesia — as a manufacturer of Magnavox televisions, Norelco shavers and Philips incandescent light bulbs, Royal Philips wants to get away from home electronics and instead sell hospital scanning and monitoring equipment and high-tech light bulbs made with light-emitting diodes.

“We were a technology-driven company,” said Gerard J. Kleisterlee, the chief executive of Philips. “But that is only one element. Now we are focusing on care cycles. ‘Health and well-being’ is a common theme that everyone works on.”

The company’s chief financial officer, Pierre-Jean Sivignon, put it another way: “An uptick in world aging and chronic diseases will drive our business.”

Getting rid of divisions and rehabilitating others is nothing new to Philips. The company has shrunk, in terms of annual gross sales, by 30 percent over the last seven years, to 26.8 billion euros, or about $37.5 billion.

It continues to sell businesses. In 2006, it sold 80.1 percent of its semiconductor business. It reduced its share in LGPhilips LCD, a joint venture with LG Electronics of South Korea to make TV displays.

Philips never made any headway in the low-margin, increasingly commoditized television business. It announced last April that it would cast off its American and Canadian TV operations and license the Philips brand to Funai in exchange for a royalty on sets sold. It has also ended TV sales in Australia and New Zealand.

It did not do much better with other home entertainment products. On Jan. 1, it will discontinue selling DVD, Blu-ray and home theater surround-sound devices in the American market. Funai, a Japanese company, will make and market the products with the Philips name. The company will continue to sell TVs in some markets, and it will also keep selling MP3 players, shavers, toothbrushes, baby care products, home appliances and portable music accessories. Only two years ago, half its revenue came from consumer electronics, but now it is less than 43 percent.

“I could see the day when they get out of TV in Europe,” said Simon Smith, director and equity analyst at Credit Suisse in London. Mr. Smith noted that in this low-margin business, Philips “innovates around the edges,” to maintain profits.

Yet even though the world is simultaneously aging and becoming more environmentally conscious, the sudden economic downturn could change Philips’s short-term fortunes. Last month, Philips said it would lay off 1,600 health care division employees, 5 percent of its work force, because of the recession. And it is unlikely that an LED light bulb that costs more than $50 will find many eager buyers as companies and households cut back.

Mr. Kleisterlee wants to get Philips back to the size it was in 2000. “In five years, I want to grow Philips to a 30 billion euro ($37.9 billion) business,” he said.

To get there, Philips has gone on a buying spree. In the last two years it has picked up 16 companies, 11 of them in the United States, including some that specialize in health care and lighting.

Philips bought Lifeline, a home health care monitoring system, and Respironics, which makes equipment to treat sleep apnea and other sleep disorders. The division already specializes in medical imaging, competing against General Electric and Siemens in advanced CT, MRI and X-ray machines, and claims a 40 percent global market share (50 percent in the United States) for in-patient monitoring, including ultrasound and other pregnancy-monitoring equipment.

Philips also sells cardiac home monitors that transmit data to a doctor’s office, home defibrillators and a variety of out-patient monitoring systems for assisted living operations.

Its new Lifeline division extends the reach beyond the hospital by monitoring 720,000 elderly or infirm at-home customers in the United States and Canada. It is also working with an intriguing business model. “I don’t want to sell blood pressure cuffs and defibrillators,” said Ronald Feinstein, Philips Lifeline’s president. “I want to give them away and charge a monthly fee.”

Customers, who pay $35 to $45 a month, are given a pendant or a TV set-top box that connects to Lifeline. If they experience a medical problem, they push a button on the device to summon help.

The company loses about 35 percent of its subscribers each year, mostly because of death. Nevertheless, the subscriber base has been growing about 10 percent a year. The company says it has 60 percent of the home-monitoring market in the United States.

The final addition to the revenue stream: the 250 installers who show the subscribers how to use the devices also sell them other products, like fall detectors and automatic pill dispensers.

The second part of its shopping spree secured Philips a leading position in the market for the next generation of light bulbs that may eventually replace compact fluorescent bulbs. It bought Color Kinetics, a developer of advanced LED lighting products, and Genlyte, a lighting fixtures maker best known for its Lightolier brand.

Lighting is also expected to make important gains in emerging markets as consumers there gain more income. “One of the very first things people buy in emerging markets is light,” Mr. Sivignon said.

Most of the lighting will use LEDs, or what the industry calls solid-state lighting. Philips is spending heavily on the technology. The bulk of its research and development budget, about 5.2 percent of global lighting revenue, is used for LED research.

Philips expects that in two years, 20 percent of its lighting sales for commercial use will come from LEDs. The company is using demonstration projects to promote its vision of lighting’s future. The London Eye ferris wheel has been retrofitted with Philips LED products. Dean Kamen, inventor of the Segway, plans to use Philips LED lights exclusively on an island he owns near Connecticut to cut his power consumption. Philips has also bid on a project to light the Empire State Building.

LED bulbs typically use one-tenth the power of traditional light bulbs and last up to 20 times as long. But their prices remain high — a LED that could replace a $1 incandescent light bulb or a $2 compact fluorescent bulb now costs about $60. So until volumes go up and prices fall, the bulbs will mostly be used in commercial settings, not residential.

Mr. Kleisterlee said, “Without it, we would have had a dying business. The world wants more lighting and more efficient lighting.”