The Digital Undercurrent

The sale of Charleston-based Digital Lifestyle Outfitters to Royal Philips Electronics in April was not only a mark of substantial success for DLO's founder Jeff Grady, but also affirmed that nurturing small digital companies is an effective economic development tactic.

DLO, a privately held company operating from Charleston and Raleigh/Durham, N.C., designs, markets and distributes accessories, including docking stations, FM transmitters, cables and cases, for mobile audio-visual devices such as MP3 and video players. When the transaction closes, DLO will become part of the Peripherals & Accessories business unit of Philips' Consumer Electronics division.

"The days of cheap labor and tax incentives are giving way to a well-educated work force, competitive broadband infrastructure and quality-connected places," said Ernest Andrade, executive director of the Charleston Digital Corridor. "You help a company get here and get settled in and you do what you can to help them grow - sort of a 'service beyond the sale,' if you will - and they can end up succeeding beyond anyone's wildest dreams."

"DLO is the prime example of why we need to keep putting our resources into assisting the seemingly smaller companies, because they're only smaller in number of employees, not in potential. I believe we're going to see many more examples like this," he said.

Daniel Dechert, president of Nanoscreen, another high-tech company assisted by the Charleston Digital Corridor when it first came to town, agrees with Andrade's assessment. "You want to get as many irons in the fire as possible in terms of helping the small digital companies," Dechert said. "And eventually some of those irons will start blazing."

In the case of DLO, which realized sales of about $100 million in 2006, mainly in the United States, its growth caught the attention of Royal Philips Electronics, which is headquartered in the Netherlands and employs about 121,700 in more than 60 countries worldwide. The company is a market leader in medical diagnostic imaging and patient monitoring systems, energy-efficient lighting solutions, personal care and home appliances, as well as consumer electronics.

The global market for accessories around MP3 players exceeded $4 billion in 2006 and currently sees annual growth of more than 10%. The deal with DLO will make Philips a leading player in peripherals and accessories for the mobility domain. Jeff Grady, DLO's president and CEO, said teaming up with Philips will enable the company to expand outside the United States as it capitalizes on Philips' global distribution network with key retailers.

However, not all digital companies are destined for an acquisition like DLO's, Dechert said, adding "if we make it a point to help as many of these small companies as we can, then just by sheer numbers, a few will turn out to be winners." Going after the large companies such as Google and Boeing, "takes a lot of resources and man-hours, and you might not get the deal anyway. I think we should definitely continue to try to get the big guys in here, but maybe we could share resources in trying to get both big and small companies," he said.

However, putting resources into courting smaller companies is difficult at best and less likely to happen, said Arnold Hite, professor of economics at Charleston Southern University. "It's true that much of the economic growth in this area is coming from small companies," Hite said. "That's also true at the national level. From a macro standpoint, big growth doesn't come from the Fortune 500 companies but from the small businesses; not just digital companies, but all small businesses, those companies with fewer than 20 employees."

The problem, Hite said, is two-fold. "In business schools like ours, it's harder to train how to develop a small company to be successful because each company is unique. So we don't have a good model, which means measuring what's effective is more difficult," he said. "It's also problematic that most economic development groups have a limited recruiting budget, so they'll want to maximize their gain, and they're not going to do it with small companies. They focus on the big company because it's easier to do."

There's also a political element, he added. "Think about it: When the politicians take credit for bringing in business, they're not going to make a statement that 20 companies with 10 employees each are coming into the area. They'd rather publicize bringing in the big company," Hite said.

Andrade agreed. "Communities are typically predisposed to celebrating things that on the surface might appear to be bigger," he said. "What they don't realize is that the nature of economic development is being able to create a culture of support for them to get there, and then making sure they're successful after they get here."

That concept is what brought Nanoscreen to the area. "We didn't just come here and set up shop," Dechert said. "We made a conscious decision to see if the area even had facilities to do what we wanted to do. That's when we met Ernest, and after that, the (Charleston Digital) Corridor was a way for us to network and get assistance."

"What the corridor has done is come up with a recipe to jumpstart a little company and get them going with little or no maintenance. They're able to be a sounding board for a small company and help with things like where to get permits, small matters like that. Being able to answer small questions is so invaluable, especially to people who don't know the area," he said.

One of the problems Dechert ran into was finding office space with a two-year lease instead of the longer-term leases most places were offering. Andrade put him in touch with a company that would take a short-term lease, Dechert said. "Our plan from the beginning was to build within a few years, so that would have been a show-stopper for us," he said. "That seems like a relatively small thing, but that was critical to us."

Being able to provide information on purchasing land, tax advantages and benefits in the different counties and other incentives are the types of assistance the small companies need along with the big companies, Dechert said. "The big companies are given all kinds of incentives and tax breaks to consider moving here, but letting the small companies know what's available to them is part of helping them succeed," he said. "If they're missing some of those benefits, it could slow their growth. A dollar saved is another dollar put toward growth."