August 12, 2013
Olympus and Nikon announced sales results last week that indicated mirrorless sales were falling short of expectations. The New York TImes reported that Nikon reduced its sales projections going forward. Digital Photography Review also reported that sales of PEN cameras by Olympus were disappointing. These results led to a flurry of web commentary that indicated the end is nigh for the mirrorless revolution.
The mirrorless doomsayers are making a fundamental error; they are confusing the state of the industry with the state of the technology. Make no mistake; mirrorless will be the dominant style of camera in the moderate term. Mechanical mirrors have certain advantages currently, but those advantages will be eroded as mirrorless technology improves. Eventually the improved technology and lower cost will make the SLR design obsolete.
So what do the recent financial results tell us? They tell us that the camera industry is a terrible place to be today. If you have an undergraduate or graduate business degree, at some point you probably learned about Porter’s Five Forces in a strategy class. This is the classic tool for analyzing an industry. Here’s a quick summary of a Five Forces analysis of the camera industry
- Threat of New Entrants — Moderate to High Any consumer electronics firm is a threat to enter this industry. Look at Samsung’s relatively recent emergence for an example. The only factor helping here is the switching costs for consumers that are locked into a current lens investment.
- Power of Buyers — Low One bright spot for the industry… Consumers do not have a lot of power. No single consumer buys a significant portion of the industry’s total output. Moreover, switching costs are significant due to proprietary lens designs.
- Power of Suppliers — Moderate to High A few suppliers manufacture key components for the camera industry. Most significantly, image sensor manufacturing is concentrated. Some manufacturers have been able to vertically integrate, but the pace of the technology change means large investments are required for this strategy.
- Threat of Substitutes – High Smartphones are viable substitutes for many consumers. This means camera makers must develop differentiated capabilities for their products to mitigate this threat.
- Competitive Rivalry – Extremely High There are many players in this industry and differentiation is low. Slowing sales growth exacerbates the rivalry. Many players are competing for a share of a slowly growing pie.
The Five Forces analysis tells us that the camera industry is an unattractive industry (using Porter’s terminology). Achieving competitive advantage is difficult and industry returns are likely to be minimal for most of the players. This doesn’t mean that every firm will be impacted in the same way and it doesn’t mean that consumers will lose many options. What it means is likely consolidation among the competing firms and a shifting roster of firms in the industry as competitors enter and exit. Think of the airline industry in the US as an example.
The high level of competitive rivalry is actually beneficial for consumers. We are likely to have many choices at affordable prices as long as the industry dynamics remain stable. What this doesn’t mean is that mirrorless technology is failing. Canon and Nikon are struggling with mirrorless sales because they desperately want to protect their high margin SLR business with its expensive complements (e.g. lenses and flashes). Olympus and Panasonic are struggling with mirrorless due to a lack of consumer awareness of the benefits of smaller format cameras.
What we really have going on here is a format war, not a war between mirrorless and mirrored technology. Will large sensors with their unrivaled image quality (but heavy lenses) dominate, or will smaller, lighter cameras with diminutive sensors win with their “good enough” image quality and carrying convenience? I’ve said before (Part 1, Part 2) that I think eventually consumers will migrate to smaller cameras and I think the that the micro four-thirds standard hits the sweet spot for convenience and quality. I continue to believe that Canon and Nikon are making strategic blunders with their half-hearted forays into the mirrorless, small sensor world.
In the meantime, I am using my micro four-thirds gear more, and my large Nikon DSLR less. I think that trend will continue for me until I make the jump and sell all of my Nikon gear. When will that happen? I’m not sure, but I think the date is rapidly approaching.