Can The Home Theater Business Re-price Itself Back Into The Hearts and Wallets of Consumers?

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This recession is a bitch. The talking heads on the Sunday morning shows were shooting off this weekend about the fact that the American economy was headed into recession no matter what, but the collapse of the real estate market and the ensuing cancer that ran through the banking industry has made for an economic event the likes of which most of those alive today have never seen. Unfortunately, they are right and, while there are some signs of improvement, most are saying recovery will be slow, unlike the boom times that often follow a deep recession.

The home theater industry's success is tied to the real estate market, as AV systems become more and more frequently installed into our homes. As an industry, the CE guys always have something new and cool to sell to consumers, be it DVD or satellite TV or HDTV or plasmas or Blu-ray. Flat HDTVs make so much sense to consumers that, even in today's recession, they sell by the millions per month, domestically and abroad. If you think about it, flat HDTVs have fallen in price faster than even personal computers in their heyday. Eight years ago, a 50-inch plasma HDTV cost nearly $20,000. The same set (likely a better one) might cost $899 today. The video industry sells on volume and price, so most of today's HDTVs are relatively affordable. That is their recipe for success.

Audio, a far more profitable business than video, isn't as good at selling on volume and price. HDMI has crippled audio products, as consumers don't know if they should have bought in at HDMI 1.2 or 1.3 or should they wait for the built-in consumer excuse known as the pending arrival of HDMI 1.4. Audiophile companies struggle to keep up with the technological curve, as electronics are far more digital than analog these days, yet their engineering strengths are much stronger in the analog domain. In many ways, audiophile companies are having a tough time keeping up.

Where specialty AV companies are having the most trouble is with re-pricing. Blu-ray players and LCD HDTVs drop in price like stocks in my SEP IRA and consumers line up to buy them en masse. Audiophile components get more and more expensive every year, for reasons including the cost of copper, high corporate overhead, growing shipping costs and the sheer expense of doing business in an increasingly digital world. Historically, consumers simply paid the higher price, but in today's luxury market, the competition is so steep that the other categories that the consumer electronics business battles with (think: travel, clothing, watches, restaurants etc.) are dropping their prices to stay afloat. There was an article in the New York Times recently about how owners of properties that license Four Seasons name are unhappy with management because the high-end hotel chain refuses to drop their prices low enough to keep the rooms filled. Specialty AV companies in many ways have the same problem. They expect rich people to always pay more for their gear, but today, rich people have choices about where to spend their money - a lot of choices.

Looking at positive examples from the audio/video business in the higher-end AV preamp market, brands like Anthem and Classe are selling out entire runs of their $8,000 AV preamps that are loaded with all of the latest features and packed with audiophile sound. Other companies looking to sell units for many times more than that are sitting with inventory on the shelves. As crazy as it seems to the layman, an $8,000 AV preamp is the right price for an AV enthusiast with a developed system featuring all of the cool new sources and audiophile roots. $30,000 is a much tougher sell in any economy. Today, it's nearly impossible.

Dealers in boom-then-bust cities like Las Vegas are seeing sales happen. However, the overall ticket price for an entire system has dropped by many multiples. Gone are the days of a developer pre-selling $40,000 AV and multi-room systems for tract homes. Instead, we have the reality of "the empty city," where people are getting foreclosed on in record numbers. The retailers who will survive this economic mess are finding ways to add value over the Frye's and Best Buys of the world so that they can eke out the profit they need to keep going. Wal-Mart and Costco simply don't operate on the same margins that specialty AV stores need in order to survive.

As much as AV manufacturers like to think retailers drive all of their sales, they are dead wrong. Consumer electronics sales are driven by the consumer, and the consumer wants both value and service. The specialty AV manufacturer and retailer must provide a fair price and better service, so that consumers opt to spend even a few percent more to buy from the specialty shop over the warehouse or big-box store. Products need to be priced right with more features for less money to woo consumers from spending what extra money they have on something other than new home theater gear.


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