Lord of the Mice

Guerrino DeLuca, the CEO of Logitech International, is up from his chair again, grabbing hold of a black steering wheel, the kind that kids use when they play the blockbuster race car game Gran Turismo on their PlayStations. With all the enthusiasm of a gamer, which he is known to be, DeLuca explains the merits of Logitech’s latest version of the wheel. It lets the driver feel the bumps on the road and the slipperiness of rain-slicked pavement. The wheel spins nearly three times around, too, just like one a pro driver would use. “You have to have someone fully immersed and feeling like he is driving one of these cars,” DeLuca says. “And you know what? It works.”

If DeLuca sounds psyched, it’s not only because he’s a self-described product freak obsessed with all the tinkering that goes into any new high-tech toy. It’s because 20-year-old Logitech is winning its own race. If you use a computer, chances are you’ve used a Logitech product, whether it’s the company’s bread-and-butter tool-the humble mouse-or any of its keyboards, speaker systems, joysticks or video cameras for PCs. Building on products priced largely under $100, Logitech is now a billion-dollar company that’s thriving while much of Silicon Valley is reeling. From DeLuca’s point of view, speaking in a conference room at Logitech’s Fremont, Calif., headquarters, “I am the luckiest CEO on earth.”

Well, let’s not get carried away. But it’s true that the Swiss-American company’s financials prove that selling mice, among other things, can make you a pretty big cheese. In fiscal 2003 ended March 31, Logitech’s revenue hit $1.1 billion, up 17 percent from the year before. Net income rose to $99 million from $75 million in fiscal 2002, a 32 percent jump. The company introduced 91 new products during the year and expects revenue in fiscal 2004 to reach $1.2 billion. “The number one reason for our financial success is that we make products that people want to buy,” says Kristen Onken, Logitech’s chief financial officer.

PC sales have been flat for the past two years, with many families concluding that new computers are luxuries they can’t afford, but they are willing to spend on peripherals. Logitech lets consumers do more, for under $100 a pop, with the computer they have and morph it into what they want it to be: a stereo, a multimedia game, a videoconference center. “The PC is the center of the world,” says DeLuca, 50, in an accent that traces back to his native Italy. “The PC is work, it’s fun, it’s communication, it’s surfing the Web, it’s buying. It’s everything.”

With that in mind, Logitech has moved to diversify its product line to avoid getting squashed if one product fails. When Deluca joined as CEO in 1998, about half of Logitech’s sales came from making mice for computer companies such as Hewlett-Packard and Dell. Margins on the sale of a mouse to a computer maker are about 10 percent, says Gartner Group analyst Martin Reynolds. Compare that to the typical 60 percent margin on a mouse packaged to sell separately in a retail store, he says. DeLuca knew the margins were a lot fatter there and there was a chance to build Logitech’s brand, so he started pushing the $30 to $85 mice onto retail shelves.

Thrives in stores

Today, about 15 percent of the company’s business comes from building mice for PC makers; the rest is from retail sales. Logitech was one of the first PC peripheral companies to thrive on the store shelf, says Stephen Baker, an analyst at NPD Techworld. “They’ve been able to hold that under the onslaught of no-name brands and the gorilla that is Microsoft,” he says.

While fiercely competing against Redmond, its top rival in both the cordless mouse and keyboard markets, DeLuca has also moved into uncharted waters. In February 2001, the company paid $125 million for Labtec, a maker of speakers, headsets, microphones and other audio products for PCs. Two years later, the company is No. 2 in the speaker market.

DeLuca proudly points to new $399 Z-680 5.1 speakers, Logitech’s priciest product, resting on the floor. The speakers, which provide rattling surround sound using “Star Wars” creator George Lucas’s THX technology, are one of the most successful products the company will ship this year. (The speakers have earned high praise on Web sites catering to home theater enthusiasts.)

International Data Corp. analyst Chris Chute credits Logitech with innovating in whatever markets it enters, pointing to the union of instant chat and the PC-based camera as an example. In 1998, Logitech bought QuickCam, a unit of Connectix, a deal that positioned the company for the explosion of shared video and photos online. DeLuca, who uses a PC camera when he chats with his college-age daughter, has worked closely with MSN and Yahoo to make chat services and PC-based cameras work together with the click of a mouse. Today, Logitech holds 42 percent of the $700 million market for PC camera and video products, according to IDC.

The company was born in Europe, where engineers Daniel Borel and Pierluigi Zappacosta, a friend from Stanford, founded the company in 1981 on a farm in Apples, Switzerland. Borel, who is now Logitech’s Europe-based chairman, called the rural office space a “Swiss version of (Hewlett-Packard’s) mythical Palo Alto garage.” In 1984, Logitech unveiled the first cordless mouse, which uses infrared technology instead of a track ball.

Today, Logitech operates out of pared-down Fremont headquarters, but does most of its research and development in Switzerland, where its holding company is based. Half of what Logitech sells is built in company-owned factories in eastern China, where about 3,000 people work. The rest is outsourced in China, Thailand, Hungary and Mexico.

Outsourcing helps

The company began moving toward outsourcing when factory costs got out of control during the 1980s. DeLuca says combining factory ownership with outsourcing is a formula that works for Logitech. Gartner’s Reynolds believes the company will continue to outsource to control costs. He says he wouldn’t be surprised if Logitech sold all its factories to get the cost off its balance sheet. DeLuca, however, argues that the company must run its own factories because PC makers demand it. Factory ownership provides the flexibility Logitech needs when it’s under the gun to make thousands of mice. “We feel if you outsource, the premium you pay to the outsource partner will erode your margins too much,” he explains. “And more importantly, you lose control of costs. By not doing it yourself, you will never know whether your outsource partner is actually costing you a premium.”

As for product design, many devices-including mice, game pads and keyboards-are conjured up in a small town outside of Dublin, Ireland, at a hip firm called Design Partners. The company makes everything from spider-like camping stoves to sleek airport chairs and has had a long-standing relationship with Logitech. “They are as aware of what makes a Logitech product as anyone in this company,” DeLuca says. Logitech also works with IDEO, the influential design firm known for handheld devices such as the Palm V, and for designing Apple’s first mouse.

His roots at Apple

It is perhaps Apple’s influence-the attention to branding and design-that is striking when speaking with DeLuca, who ran worldwide marketing there before leaving five years ago. “I learned a lot about products, a lot about designing and ease of use and how to think of the customer, and the consumer and the user first,” he says. DeLuca admits he uses a Dell computer (gasp) in his office, but tinkers with two Macs at home in San Francisco, which he shares with his wife and two children. DeLuca’s currently drooling over Apple’s PowerBook G4 notebook computer with a 17-inch screen. “I’ve seen one and said: €˜Whoa, I need it. My life will be just miserable without it.'”

While DeLuca was known as a marketing guru at Apple, he spends most of his time at Logitech working on products, deciding which ones get the green light and which ones get ferried to the island of lost toys. The company is obsessed with design and engineering, he says, mainly because word of mouth can either make products wildly successful, or help kill a brand. “You have no idea how many products get returned” industrywide, he says. Over-engineering-making a product too complex for the average consumer-is the company’s biggest enemy. “We have probably one of the least known skills at Logitech: the ability to build software applets that compliment our products. You actually put the CD in and you say: OK, it works.”

When DeLuca looks at one of their newest designs, the Io Digital Pen, he sees beauty in its simplicity, but also room for improvement. The cigar-sized pen is meant for people with jobs that require lots of note-taking. It uses an optical sensor to record handwriting as you scribble on paper. After, you stick the pen in a cradle and download whatever you’ve written to your computer. Logitech has sold about 30,000 of the $200 pens, mostly to early adopters who have to get their hands on cool stuff first. “The pen is one of the promising things we are doing, but it is unproven,” DeLuca says. If DeLuca is true to form, he’ll stick with the pen until it’s on millions of desktops-preferably resting right next to an $85 Logitech mouse.