Philips Focuses

In a move that Kenny Rogers would likely approve, Dutch electronics giant Philips Electronics N.V. (NYSE: PHG  ) announced yesterday that it will be folding its hand and exiting the market for rear-projection TVs based on LCoS chip technology (which blow up images on a screen, reflected off of microscopic mirror-laden chips). The chip-based rear-projection TV market is dominated by American rival Texas Instruments (NYSE: TXN  ) , which uses a different kind of chip. Even so, that hasn't deterred chip specialist Intel (Nasdaq: INTC  ) from entering it with chips based on the same kind of LCoS technology that Philips now uses.

Which begs the question: Is Philips making a mistake by exiting the very market that Intel wants to break into? I don't think so. Philips admits that it has precious little market share in rear-projection televisions. Japanese rival Sony (NYSE: SNE  ) has been eating Philips' lunch here. So look at this from Philips' perspective: Its tiny market share denies it the opportunity to gain the kinds of production economies of scale with which to compete effectively. When faced with a situation like that, a company will often be better off conceding the field to its rivals and focusing on a market where it has some advantages.

LCD TVs, for instance. As we've written here before, Philips has already committed a great deal of time and money to its investment in LCD production, and has found a reliable and expert partner in Korea's LG Electronics. The two companies brought public a joint venture to produce the popular flat screen TVs earlier this year: LG Philips LCD (NYSE: LPL  ) . So, given the choice between competing in a tightening market where it lacks any real advantages with which to compete, and abandoning that market to focus on one in which it has real advantages, I think Philips is making the right call here. It's a prudent business decision, and one that Philips investors should applaud.

Want to learn more about the investment potential of the LCD producers? Read:

Fool contributorRich Smithowns no shares in any company mentioned in this article.

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