Since long before the turn of the millennium, every January has brought to Las Vegas the humongous trade show and conference known as CES. Those three letters no longer officially stand for Consumer Electronics Show, but that’s how many people in the industry still refer to it. The very term “consumer electronics” is usually considered a category of devices, as in a department in retail stores where consumers buy their boxes of TVs, audio and video players, cameras, etc. But as the industry has evolved, more and more of the products have included (or in some cases wholly become) intangibles and/or services. In recognition of such trends, two months before this year’s show the organization behind CES, the Consumer Electronics Association, officially changed its name to the Consumer Technology Association. Although CTA says it has no plans to change the CES show name, the industry shift is evident.

As Harvard Business School Professor Theodore Levitt famously put it, “People don't want to buy a quarter-inch drill. They want a quarter-inch hole!” Levitt’s principle is behind, for example, the migration of music consumption from purchasing of physical media (CDs and vinyl records) to purchasing of digital media (iTunes downloads) to streaming digital media without ownership (Pandora and Spotify). Which raises another important question: When people want a hole, what determines whether they buy or rent a drill to make the hole themselves, vs. hire someone else to make the hole for them? Increasingly, at least a portion of consumers are opting to hire someone else, and vendors who previously built and sold the drills are offering to make the holes or even devise alternative methods of affixing things without requiring holes. Although many makers of devices for commercial applications have long offered their devices as a service, this phenomenon is relatively new to consumer markets (with the notable exception of vehicle leasing).

In the market for actual drills and holes (as opposed to metaphorical ones), this trend would be equivalent to the likes of power tool makers Stanley Black & Decker and Bosch providing carpentry and architectural design services. This is not as far-fetched as it might seem, as Stanley Black & Decker and Bosch both have substantial commercial services groups, and presumably could expand into consumer services if they deemed it sufficiently profitable. (Bosch is also one of the world’s leading suppliers of automotive technology, but more on that in Part 2 of our CES 2016 blog posts.)

However, the reason Google bought Nest wasn’t because it wants to sell thermostats or even provide heating services. Google wants to leverage thermostat data into new types of services. In other words, Google wants to collect, use, and monetize information about who’s buying drills and how and where holes are being made. This is a very different mindset from the way the consumer electronics industry has historically operated.

Most of the traditional consumer electronics vendors are inadequately prepared for such business transitions, either because of limitations of their legacy corporate skills, or because of vested interests in maintaining the status quo (e.g. potential conflicts with existing business). Sony, despite owning one of the world’s largest music production and publishing companies (now called Sony Music Entertainment), failed when it offered and later shuttered the Sony Connect music download store, partly because of its insistence on digital rights management (DRM) and its proprietary ATRAC music format. And Apple and Samsung won’t likely become cell phone service providers if they want Verizon, AT&T, et al. to continue to subsidize mobile handset purchases.

So how does all this relate to CES 2016? Three ways. First, an estimated 20,000 new products were featured at the show this year, many of which were touted as "IoT." Back in the days when products were just products, when we received briefings on new products we would typically ask about specifications, pricing, and marketing. Now, we almost always have to ask about ancillary services (such as monthly fees to effectively use the touted features) and data rights (who can do what with which data derived from the product’s usage). We usually get acceptable answers to the former, and poor or no answers to the latter. Today it is simply not within the purview of a consumer electronics company’s sales and marketing department to address users’ data rights issues. As the market evolves further into data about making holes, that will need to change.

Second, the prospects for each new product now need to be evaluated in the context not just of the competition, but also of the vendor’s own existing products and business relationships. Which startups have adequate funding and partnerships to achieve critical mass with their innovations? Which established vendors have the intestinal fortitude to cannibalize their own revenues when vying for an early stake in a future market pie? The latter point is especially relevant when the existing revenues are device-based and the future potential is service-based.

And third, the mainstream press is often justifiably enamored with all the latest consumer electronic gizmos being pitched for sale. But more interesting to us at VDC, and where we focus more of our attention, are the technology and business trends that will be shaping consumer electronics products that won’t become prevalent in the market until future years. For more on a couple of such key trends, look for upcoming Parts 2 and 3 of our CES 2016 blog.