It wasn’t five years ago that specialty audio-video companies were raking in the dough. President Bush, after the country was gutlessly attacked by Al Qaeda, told the American people the best way to get revenge was to go out and spend money. And money we spent – on our credit cards, from our home equity and sometimes even out of our IRAs. With the housing market booming at 25 percent per year, every year we could afford it. We were living large and the home theater business, powered by increasingly affordable flat HDTVs, was rocking as hard as Slayer live in Detroit. These were good days indeed (even if the guy responsible for 9/11 never got caught), as we all were worth more with every housing comp and despite every withdrawal of equity from our homes.
Roll the tape forward a few years later and we see a specialty home theater business continuing to be powered by the still-strong consumer demand for beamingly bright HDTV sets, yet there are fewer and fewer places to buy them by traditional distribution standards. The first shoe dropped when the once-$750,000,000 market-capitalized Tweeter dropped dead from the incurable disease of total mismanagement and lack of market vision. 77-store regional chain The Good Guys! was another one to go, leaving broken leases and AV companies wondering what to do next. The killer was of course the recent Chapter 7 bankruptcy of the almighty Circuit City. This wasn’t Crazy Eddie going out of business here – this was a massive national chain that moved billions of dollars of consumer electronic for hundreds of companies. The ramifications of these closings are being felt right now and they honestly don’t feel too good.
Specialty AV manufacturers loved the easy-come money of a gigantic purchase order from the likes of, say, a Tweeter, yet they didn’t invest the money in creating consumer demand to support the new, expanded distribution chain. Nor did AV manufacturers adequately support their Mom and Pop dealers with the type of marketing and collateral support that they needed to keep up with the larger chains. AV makers instead looked to “trunk slammer” installers and custom home theater firms that buy gear from the likes of AVAD on a project by project basis. Meanwhile, the three-decade rise of specialty audio had been built on the backs of specialty dealers, who were, and are, in desperate trouble.
Today, for many AV companies, it feels like there is nowhere to sell specialty AV products in any meaningful and profitable way that represents the way business was done less than five years ago. Sadly, this is in many ways true.
As a consumer: do you believe that you need an audition or a demo of a $10,000 speaker system before you buy it? If so, are you willing to pay an extra $2,500 for new speakers (over the used price for the same speakers on Audiogon) to support your local dealer? And for that support, what extras do you get? When you buy a used Honda from the dealer, they do 99-point testing on the car and extend the warranty. When you buy a Mark Levinson amp at retail from a specialty dealer, what do you get that you don’t get from buying it on eBay?
Will you, the consumer, pay for video calibration and professional installation, including all of the “nickel and dime” parts and labor charges to support your local dealer, or will you save $300 and order a new HDTV from Amazon.com and do the installation yourself?
These are the tough questions that consumers are asking today and often they are opting for the lowest-cost option when they consider making a move in their systems. A $199 Blu-ray player isn’t going to break the bank, even in these tough times, but if you can buy a pair of Wilson Audio speakers out of state and save 8.25 percent tax and still get a healthy discount, it’s hard to justify spending the extra money to support your local dealer. The questions you should ask yourself: where will you go for that personal demo when your local dealer closes his or her doors? What can AV manufacturers offer to you to support the traditional dealer chain in terms of added values? If you got a quarterly SACD or LP from David Wilson’s audiophile recording label, would that add value to buying your speakers from the dealer? If Wilson hired and trained a team of speaker calibrators, complete with expensive measurement systems, and they came to your room to bless your speaker placements and imaging, would that inspire you to support your local dealer and spend the extra money over buying the same pair of speakers used? If you bought a pair used, wouldn’t you still want to have Wilson come out and tune your speakers for you when they came to town every year or so, even if it cost you a grand or two, so that you knew you were getting the most from your investment?
Companies like Vizio have been the best recently at exploiting (I mean the term exploit in the best, most Hollywood sense of the word) new markets. While working on painfully small margins, Vizio has made Costco and Walmart more viable places to buy an HDTV than Circuit or Tweeter. Five years ago, nobody could say that they would buy a quality HDTV at a warehouse store. Today, millions of people buy HDTVs at these stores every month. Vizio, in their model, has found their multi-billion dollar niche. Have specialty audio-video companies done likewise?
THEIL Loudspeakers angered many of their most loyal dealers by opening a large catalog reseller, Crutchfield, a few years back as they were looking for new ways to sell their audiophile speakers to new consumers. MartinLogan lost dealers that they could really use today when they opened Tweeter, but grew their company’s sales in the short term and even sold the entire company, based in part on sales made from opening Tweeter. Bowers and Wilkins is still reeling years after firing its beloved reps in a controversial move that dealers didn’t approve of, but in their defense, they spent more money on dealer programs and support. Call these moves successes or failures as you see fit, but they are moves to reinvent the way specialty audio/video is sold today. The most important way this can happen is with more consumer demand. A vanity ad in an audiophile print magazine that reaches (maybe) 20,000 Baby Boomer readers isn’t going to get the phone ringing off the hook for, say, a Krell PAPADOC/KID iPod controller and amp, but convincing the kids at Gizmodo that a $3,500 audiophile iPod controller is worth the money might just create some new demand from a new audience in a new way.
One of the most endemic and tragic mistakes made by the historically poor marketers in the specialty AV business is to promote provincial, one-dimensional distribution. A great example of how the claim of being the “only XYZ dealer in our city” is proven wrong is Mercedes Benz in Southern California. In most cities in America, Mercedes is a protected brand in terms of distribution. For example, in the Phoenix area (the fifth largest city in America), there are three Mercedes dealers – perhaps four now – for millions of residents. The prices for the German cars are sky-high and the dealers sell with the arrogance Julia Roberts’ character in Pretty Woman saw when she went shopping on Rodeo Drive. In Southern California, Mercedes dealers are everywhere. In Orange County – where Mercedes populate the freeways like a Toyota Camry or Honda Accord in other less “bling bling” areas of the country – three of the top four volume Mercedes dealers are located within 15 miles of each other. The competition is good for business. The dealers sell more cars. They do more test drives. They get more people going to lunch in a new SL55 AMG, thus creating more parking lot envy, which in turn drives more people to the dealer to see how they can get their wives new C-Classes. Success breeds success.
There are examples of protected business models in the specialty AV business, such as Seattle’s Definitive Audio, which is pretty much the number one single store dealer for every brand they sell. While Definitive demands exclusivity if you want to sell to the power players and SVPs from Starbucks, Boeing, Amazon and Microsoft who frequently visit their store, you also get the near guarantee that Definitive will more than sell their share. The problem with the protected model that Definitive demands is that there aren’t other Definitive Audio stores in every major market that can support high-end retail, ultra-high-level custom install and every grade of AV sales in between. The specialty AV makers need a new way of doing business in a soon-to-be recovering market, unless they can clone Mark Ormiston about 25 times and send him to all the top markets around the country.
Going forward in a new world economy post-“the great recession,” specialty AV manufacturers need to look at all sorts of new models to build new demand for their goods. Putting all of your hopes into one element of your distribution chain is pure corporate suicide at this point. Selling online is viable for many companies in 2009, even for many “high-end” brands. Selling in luxury department stores like Meridian does with their $3,000 M80 clock radio only goes to build the power of the brand when sold along the likes of Rolex, Hermes and Giorgio Armani. Working to get in with the custom installers is likely smart, too, as the likes of AVAD allow a “long tail” approach to selling that brings specialty brands to dealers who likely wouldn’t be able to open the line with only two or three sales a year. However, when you add up hundreds of dealers selling one or two pairs, you have a powerful channel. Looking at the installer market as your only channel is a recipe for future failure. Much like a good stock portfolio, AV companies need diversity in their distribution in order to reach new clients outside of the stereotypical Baby Boomer audiophile. Those bleeding profusely from the failure of Circuit and Tweeter are no different than the people who thought Bernie Madoff was the only place they needed to invest their wealth.
In the end, it’s consumer demand that will create new boom times for the home theater and specialty AV business – opening new and creative channels will only help make the pending good times feel even better. People still want HDTVs by the millions a month. People want Blu-ray discs and the best 1080p video has to offer them. People will want 3-D as soon as they see it. People will flip for 2k video resolution and HD downloads will make every home theater as viable for Hollywood as a large cineplex. Don’t believe the gloom and doomers – the future of home theater is brighter than ever. Additionally, don’t forget that more people love music today than ever before. If you don’t believe me, just ask the 150,000,000 Apple iPod owners who can’t get enough of the music that is in their hands every day.
My challenge to the specialty AV industry is to find a way to woo people into a specialty store (I don’t care if it’s Definitive Audio, a Magnolia, a Best Buy or Neiman Marcus) and show them, say, a Meridian Sooloos media server. The transition from their $400 Apple iPhone to a $9,000 (entry-level) media server takes about three minutes. People want music in their lives. People want movies in their lives and, when the value proposition is right, they will pay for it. The question is: are the specialty AV companies smart and resourceful enough to create demand and open existing new venues to sell high-end AV as a luxury goods item and not just some nerdy hobby?