How LG’s add-on keyboard makes more profit than its phones

LG’s Rolly keyboard: strong enough to prop up a lossmaking mobile division? CC-licensed photo by Rob Pegoraro on Flickr.

LG released its first-quarter figures and, oh my, the news for its mobile division was bad again: shipments down to 13.5m (a 13% drop year-on-year), revenues of US$2.67bn at the prevailing exchange rate, and an operating loss of US$224m – that’s an average selling price of $197, and per-handset loss of $16.64.

But what caught my eye was the red ink on the mobile division seemed to go back further than before. Whereas I’d previously thought it lost money in Q3 and Q4, the latest results now seemed to suggest it had lost money in Q2 as well.

The reason why quickly became apparent: LG had restated the results for the mobile division. There in the Appendix where the divisional revenues were broken out was the footnote:

“1) The IPD (Innovative Personal Device) department within MC [Mobile Communications] division has been restated to ‘Others'”.

But what was the IPD department? What did it make?

A quick bit of searching turned up a few results, such as this Rolly Keyboard, introduced “in an effort to try to capture a larger share of the fast-growing mobile accessories market”. Or this Bluetooth headset (“designed for both professionals and avid music lovers”).

You get the idea: IPD is accessories. Happily, because LG had restated the results, it was quite easy to see how much the IPD department had been contributing to the mobile division’s revenues – and profits.

The result turned out to be surprising.

It figures

Here are the numbers (stated in Korean Wons), first for 2015:

And now the results published covering 1Q 2016 and the four quarters before it:

I put these into a spreadsheet to see how IPD was doing.

Pretty well, as it turns out. Although the revenues aren’t enormous, they point to healthy sales. The Rolly keyboard (which now has a v2) costs about $100; the Tone costs around the same. That suggests LG is shifting about a million units all told per quarter from this department.

But look at those operating profit margins: the worst is 16% and it has been nudging 20%. That’s miles better than for the phone division which, even though it turns out more than ten times as many devices that sell at twice the price, hasn’t turned a profit for a year. How come? Everyone’s heard of LG phones. Hardly anyone’s heard of the Rolly keyboard.

Accessory to the truth

But the reality is accessories have often been a far more profitable pursuit than making the original devices and they often produce a positive feedback loop. Part of the success of the iPod was the popularity of accessories. Shops liked selling them because the margins on the accessories was far better than on the iPods themselves. For instance, by the end of 2005, a US analyst company reckoned that, for every $3 spent on an iPod, another $1 was spent on an accessory such as a case, car charger or (briefly popular) in-car tuner – and retailers got about 15% margin on the iPod, against 25% for add-on electronics and 50% for a case. You didn’t even have to sell iPods to sell the add-ons or cases. And for Apple, the accessories served as an advert for the iPod.

You see the same dynamic playing out with iPhone accessories and especially cases. Look around and ask yourself how many cases you see for Motorola, HTC or – indeed – LG phones. Only Samsung is big enough now to merit its own line of accessories.

But it’s clear LG is hoping to help its profitability with IPDs and, of course, its new range of “Friends” for the LG G5. If you haven’t heard about Friends, they’re a set of add-on devices such as a camera and a high-resolution audio element: you slide them on and off the end of the phone to extend its functionality. You also buy them separately.

Part of the aim is to move towards more modular smartphones – as long as those are LG smartphones. Whether the Friends idea will come to other LG phones isn’t yet clear but the reason for doing it is a lot clearer: there’s gold, or at least profit, in accessories. If the idea takes off, it could even prop up the stumbling mobile business. If it doesn’t, well, IPD is still making a profit without phones.