Reference no: EM132099620

Will Logitech's push into smart homes make the company strong enough to compete with the tech giants? Please explain your answer from the perspective of a business owner. Please explain in two or more paragraphs.

Since Bracken Darrell took over mouse maker Logitech International S.A. four years ago, the company's stock has quadrupled, thanks to robust sales of PC accessories that complement products by the likes of Apple, Microsoft, Amazon.com, and Google. As Darrell plots his next move, those heavyweights are starting to look more like rivals. His goal—tying together TVs, appliances, and voice-controlled devices for the home—is something many of the biggest tech companies are also trying to crack. Logitech wants "to be at the center of connected homes, but you've got to sleep with one eye open," says IDC analyst Jonathan Gaw, because erstwhile allies may well become foes.

Darrell says the push into smart homes won't be a dramatic change. Logitech's keyboards, wireless mice, and neighborhood-rattling speakers always fit into the larger PC market; in newer, faster-growing categories, Darrell has sought compatibility with the tech giants. Logitech's UE Boom speakers understand Apple's Siri and Google Now, its remotes use Amazon's Alexa to control everything from TVs to heating, and its accessories can turn an iPad into a mini laptop. "There's no way these big players are going to want to be in every little puddle around their operating systems," says Darrell, 55, in a Logitech office in Lausanne, Switzerland. "We've always been in categories where the big players are."

To fund his strategy, Darrell aims to wring maximum profits from mice and keyboards, which bring in sales of almost $1 billion a year at a gross margin approaching 50 percent. That will let him enter areas such as voice control, video collaboration, and augmented-reality games. Tavis McCourt, an analyst at Raymond James Financial Inc. in Nashville, praises Darrell for turning around a company that was "really struggling to define what it was." McCourt says he expects Logitech to develop keyboards for internet TVs and a device that takes voice commands for home automation, like Amazon's Echo and Google's Home.

The big hitters have a massive advantage over Logitech, which has historically been better at commercializing others' inventions than developing its own. The company, with revenue forecast to reach $2.2 billion this year, devotes less than $150 million annually to research and development. Microsoft last year spent about $12 billion; Google, $14 billion; and Amazon, $16 billion. That could make it tough for Logitech to build products sophisticated enough to command premium prices, says Torsten Sauter, head of Swiss research at broker Kepler Cheuvreux. "They have no software, no ecosystem," he says. "Logitech is much more a design company than a tech company."

Darrell joined Logitech after four years at Whirlpool Corp. and stints at General Electric Co. and Procter & Gamble Co., where he ran Braun, the German maker of high-design shavers and clocks. His predecessor at Logitech was ousted in 2011 following lower profit forecasts and a $34 million writedown for the Revue, a keyboard for Google TV. Darrell says the company had lost its focus on design and was "just making black plastic."

While revenue was largely flat in Darrell's first three years, as he cut costs and shut down or sold less-profitable businesses, retail sales this year are expected to grow at least 12 percent from 2016, excluding currency fluctuations. Profit has more than tripled during his tenure. Darrell says he can succeed by stressing design and marketing to create hits such as the UE Boom speakers, as well as novelties such as a quieter, "clickless" mouse and a wireless dock for phones that lets users toggle between typing on their PC screen and smartphone.

Darrell says projects in the works include cloud services tied to Logitech products, such as storing video from home-surveillance cameras. Spotlight, a $130 remote for presentations, is an example of the hardware and software integration and higher-quality manufacturing Logitech is shooting for. Its weighty aluminum feel and simple three-button design are reminiscent of Apple products, and it works with both Windows computers and Macs to highlight specific areas of a screen.

Logitech is also researching how gestures may replace computer mice and looking into devices to use in self-driving cars, says Alastair Curtis, a veteran of Nokia Corp. who Darrell hired in 2013 as design chief. "When I first joined, Logitech was not in a good place," Curtis says. "I gave a brutal assessment." Now he says he's happy with the company's direction and position vis-à-vis tech's agenda-setters. "We're closer to Apple than ever before."

The bottom line Logitech has spent decades in partnership with tech giants, but its push into smart homes could put them in direct competition.