Sales Outlook For 2006

TWICE: Factory-level sales of component audio and systems took a wrong turn in 2005 (at least in dollars). Why? Will it turn around in 2006?

Peter Wellikoff, B&W group president: Factory-level sales did drop in 2005. However, the market segment most affected was in the midrange. The B&W Group experienced increased sales in 2005 with the greatest increase coming from the new Diamond 800 series selling between $2,500 and $20,000 per pair. We believe the success of this product line is due to continued growth in luxury/premium goods. This segment of the marketplace continues to flourish.

Ron Fleming, Thomson general manager, audio/video marketing, Americas: 2005 was actually a strong year for Thomson in audio systems. While certainly a very mature category and one undergoing the traditional mature-category SKU consolidation, we made gains by staying focused and incorporating an appropriate level of innovation.

Steve Baker, Denon president: I wouldn't necessarily characterize 2005 as the year that component audio and systems sales took a “wrong turn.” Audio sales have actually been in a slow decline for several years as consumers purchase more advanced digital television technology. One of the main reasons for this is that video technologies are exciting and tend to be more captivating for many consumers. The good news is that as high-definition and flat-panel products continue to come down in price, people have more disposable income for home entertainment. This gives audio manufacturers an opportunity to present their sales stories and demonstrate ways for people to upgrade and enhance their total home entertainment experience affordably and conveniently.

Sandy Gross, Definitive Technology president: I believe 2005 still saw the major sales-floor focus to be on upscale video displays. But the value-added retailers have all put a major focus on audio, and I believe we are just starting to see the results of this.

Wieger Deknatel, Philips entertainment solutions director: Yes, sales will turn around. There are many exciting category introductions for 2006, including wireless Wi-Fi solutions, that should help build momentum.

David Bales, Pioneer audio marketing manager: A combination of things contributed, but I have to believe that the consumer found new, more exciting toys to play with — most notably portable audio devices, PC products, game consoles and software, and very expensive flat digital TVs. There is no doubt that consumers do want home theater, but with $199 HTiB systems and $199 A/V receivers capturing nearly half of the unit and dollar volume, new technology is very difficult to introduce. The industry simply did not offer consumers enough compelling technology for them to step up and replace their existing audio system or components.

Will it turn around in 2006? We are cautiously optimistic. Flat-TV price points continue to come down, leaving more disposable dollars to spend on audio. New technologies like room calibration, HDMI, iPod and XM connections, PC entertainment and networking capabilities are beginning to appear in more tangible ways for more consumers. Consumers are beginning to realize that the calibration systems provided with new A/V components and systems effectively makes setup easy and ensures maximum performance for their specific listening environment.

Consumers can now “clean-up” the wire maze of the analog A/V days with new one-wire digital connections. New exciting content can be seen and heard in their living rooms. A/V receivers and A/V systems are the connection, control, switching, processing and amplification center for all of these sources of digital entertainment. Hopefully, '06 will be the year that consumers begin to realize the value and take advantage of these advanced features.

David Kroll, Boston Acoustics product development director: Our own component sales have been incredibly strong and robust in 2005. As far back as 2000, we saw changes coming in the marketplace and began to strategically address these changes by diversifying our product offerings and by specializing on products we believed would be shaped by growing consumer and dealer demand. For example, our tabletop radio offerings, such as the popular MicroSystem CD and the now-shipping Recepter Radio HD, target consumers' desire for simple, elegant audio solutions.

By developing new applications, such as our P4 Series of on-wall loudspeakers, we continue to have a strong presence in the traditional retail sector, and our focus on in-wall and in-ceiling loudspeakers has also made us a strong player in the growing custom installation market. We anticipate our strong growth will continue through 2006 and 2007.

TWICE: Have A/V specialists accelerated their efforts to concentrate on the custom market, and have they nearly abandoned any semblance of retail? Did that help drive down component audio sales?

Wellikoff: The successful A/V specialist has embraced the custom market. While many of them have diminished their midmarket retail presence, if anything they have reinforced or reinvested in their premium merchandising so as to promote high-end custom sales.

Baker: Yes, A/V specialists have accelerated their efforts in the custom installation market, but I don't believe they will ever abandon the conventional retail aspect of the business. Rather, they are concentrating on custom installation in order to grow their revenues while providing added value and service for their customers. This is a natural progression in a marketplace in which large-screen display prices have declined significantly, requiring retailers to shift their focus in order to grow profits. Attaching sales of higher-quality audio components is another way retailers are boosting revenues and increasing their bottom line profits.

Gross: Clearly the independent A/V specialists are continuing to de-focus on retail and are concentrating on custom. They have a difficult time bringing traffic in their stores and find custom more relevant to their expertise and customer base. As they put more of their sales into labor and other peripherals, clearly component audio sales have been a loser.

Don Milks, Onkyo product and marketing manager: No, I don't think this is the case. While I see the custom audio and retail audio channels clearly differentiated, much like our Onkyo and Integra product lines, I believe there will continue to be a customer for both areas. One only needs to look at some of the power retailers to see how they are attempting to capitalize on this by presenting both categories to consumers.

Bales: They have accelerated their custom efforts but not with the diversity that will ultimately be required to stay ahead of the game. Third-party control expertise will not be enough very soon. Did that help drive down component audio sales? Yes. In their defense, they had little choice to differentiate themselves from the mass merchandisers.

Kroll: The vast majority of our traditional retail partners have morphed into hybrid retailers and custom installers who have tailored their retail services to satisfy their target consumer demographic. It has become virtually impossible to find a retailer who offers no installation services.

However, we find that the stronger a dealer is in custom installation, the greater is its ability to sell component audio — and usually in some type of whole-house installation designed to complement a stereo system.

What's In Demand?

TWICE: Which feature sets in components and systems proved popular in 2005 and will drive 2006 sales?

Wellikoff: Any feature that aided in making a product custom-installation-friendly was big in 2005 and will continue to be in 2006 (such as RS-232, 12-volt triggers and multi-application speakers). More and more of our customers want to be able to integrate their complete home entertainment systems in a simplified manner.

Fleming: The integration of USB host functionality in integrated audio systems, especially when combined with direct recording (ripping) to an attached MP3 player, represents a new feature set driving growth in this category. In Thomson's case, we call this capability "Rip & Go." We are expanding that feature to more systems in 2006, along with enhancing its implementation with new features to drive growth. We're also expecting more DVD integration into [two-channel] audio systems as they become miniature home theater in a box systems. Of course, increased power and the introduction of more subwoofer systems and design options that allow placement throughout the home will all contribute to growth in audio in 2006.

Baker: The HDMI interface, iPod connectivity and a variety of networking, multizone, multiroom distribution technologies will all continue to gain momentum and importance.

Servers have proliferated in everything from PCs to iPods and PVRs, and this trend will certainly continue. Servers are in fact becoming ubiquitous as delivery systems for audio content and will continue to grow in importance among a wide range of form factors and product configurations.

Deknatel: Consumers want to be able to experience their music on their terms throughout the home. With the increasing popularity of MP3, consumers also need systems that can handle that format in addition to handling traditional CDs. A wireless system, such as the Philips wireless music center, frees consumers' music from the confines of the PC or the CD and allows it to be streamed throughout the home at the touch of a button. With similar multiroom solutions being introduced into the market, we believe this trend of wireless systems will continue to be popular with consumers.

Milks: Three key feature sets were at the top of our customer's lists for 2005 and will continue to be in demand for 2006. They were iPod capability, satellite radio and HDMI connectivity. Fortunately for us, we were ahead of the curve on iPod capability for our systems with our DS-A1 iPod dock, and we have kept current by quickly reacting to changes like Apple's introduction of the nano and video iPod.

Likewise, we were one of the first companies to offer a full complement of XM-ready receivers. Finally, we were among the first companies to offer HDMI capabilities on our flagship models as we entered 2005, and we continued to introduce new models as the year progressed.

For 2006, you will see HDMI connectivity continue to expand and work its way down the model offerings to more mainstream price points.

Bales: HDMI, built-in calibration, XM, iPod, WMA-9 audio decoders, USB inputs, reconfigurable amplifiers, custom features and support.

New Technology Impact

TWICE: Project the impact of satellite radio and HD Radio in 2006 on sales of home components and systems.

Wellikoff: Satellite and HD Radio are indeed having a positive effect on electronics purchases. This new technology is helping drive sales of other stereo-system components as well as enhance the demand for distributed audio system sales. Rotel's new RT1084 (HD Radio, Sirius, multizone tuner) is a prime example of meeting the demand for this growing need.

Baker: Satellite and HD Radio are both great technologies — Denon supports them both — and it's clear from all indications that consumers appreciate them. The reason why people like them is simple: they offer easy and real lifestyle benefits. There will certainly be a role for component digital tuner products in the future, but I have no doubt that these and other content-delivery technologies will be available in just about every product configuration and form factor.

Gross: Satellite radio has begun to be a significant add-on component sale with the advent of component tuners.

Bales: I think XM Radio set the bar for everyone with the integrated antenna/receiver. Is there much of a role for a component satellite tuner? That might be difficult with the Connect and Play feature available in under $299 receivers with additional $50 antenna/tuner. The cost to incorporate the tuner and antenna into the receiver would compromise the feature set.

TWICE: Project the impact of MP3 player (or iPod) connectivity on 2006 sales of components and systems.

Fleming: Consumers want to enjoy their digital music files wherever they are and whenever they please. This means not only in the car but also in the living room, bedroom, office and when traveling. To meet this need, we anticipate that there will be a variety of new audio-input options on new products in 2006. For example, many new clock radios will have line-audio inputs. In 2005, Thomson launched its first bookshelf audio system with a USB connection for creating MP3 files without using a computer. That feature will expand into additional products in 2006.

Baker: There's been a huge impact. Denon in particular is aware of the influence portable digital music players have had, and it's clear that tens of millions of people are now more engaged than ever before in the act of listening to their favorite music in a digital format. We're committed to providing an upgrade path for improvements and for the expansion of the music listening experience.

Take the launch of our S-Series, the first home entertainment systems to feature convenient command and control of digital music players like the iPod. They demonstrate the direction we're headed. The importance of this technology cannot be understated. In fact, I believe every retail demo of A/V components and systems should include music played back on a portable music player, which is how a growing number of people listen to their music. The demo should prove to the customer how the A/V components or system will improve the quality of their listening experience.

Deknatel: MP3 technology is very appealing to the consumer on the go. With the introduction of accessories such as portable speakers, some consumers are using their player as their primary sound system. Alternatively, there are now MP3 players, such as our ShoqBox, that have internal storage and built-in speakers for impressive sound. Accessories, such as external speakers and docking stations will continue to be popular as well.

As more consumers make the shift to such technologies and compatible accessories, they may not invest in a separate home system. This is especially true for young consumers who live in smaller spaces like lofts.

Milks: Onkyo has been able to capitalize on the success of this category by being early to offer a device that makes virtually all of our products compatible with the iPod. I think more and more consumers will continue to place emphasis on products that allow them to use their iPod, whether they are on the go, in their car or in the comforts of their home.

Bales: iPod connectivity definitely had a positive impact in the step-receiver business. Consumers love this product and want to have access to their music content from their main home A/V system and music distribution systems. Will any MP3-connectable components and systems in 2006 offer the capability of playing back video stored on these portable devices? Very possible, but the video quality of the "portable video" formats will not be of acceptable resolution for the "big screen."