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Suppliers See Component Potential Building

7/11/2005 02:00:00 AM Eastern

The component-audio market will remain challenged in the second half, in large part because it's a mature market that lives largely on replacement sales, suppliers said.

Suppliers also point the finger at competition from hot new product categories that consume disposable income, and they point out that the market has shifted from hobbyists to mainstream customers “who don't see two pieces vs. one as a better value,” said Klipsch/Jamo president Paul Jacobs. For these consumers, “simplicity is important.”

In Jacobs's forecasts, sales of all components [electronics and speakers] will be flat to down for the year, but component electronics might rise a bit.

Sean Wargo, CEA industry analysis director, also expects flat-to-down component sales in 2005, citing consumer demand for iPods, advanced video displays, laptops and digital cameras “It's not a strong time for components because of competition for disposable dollars,” he said. But sales could turn around if audio's rate of attachment to video sales rises, he said.

“There's so much buzz about displays, we haven't quite gotten out of the instinct to just sell displays,” Wargo said. Best Buy's “efforts in this area could yield better results [for components].”

Because it's largely a replacement market, said Phil Abram, Sony's home A/V marketing VP, “It will be new applications that will drive the rebound, including networking.” Networking, however, “isn't ready for prime time this year,” he said. “All [audio network products] force consumers to be a computer scientist. Next year, however, there will be more connectivity options.”

The flagging performance of national and regional A/V specialty chains is also part of the problem, suppliers said. The national specialty chains “are not doing as well as they would like with their overall business,” Abram said, and A/V specialty stores are where “a lot of people look for components.” Klipsch's Jacobs also cited store closings at regional specialist Ultimate, which was a strong seller of box speakers, he said.

Big-box retailers are taking component-audio share from these specialists, but the big-box retailers' inroads “aren't making up completely for the drops by the national A/V specialists,” Abram continued.

Despite the challenges, components show “a lot of opportunity for growth,” said Bob Weissburg, president of North American sales and marketing for D&M, the owner of multiple specialty A/V brands, including Denon and Marantz. Weissburg cited such features as picture-quality enhancement, multi-room capability and XM satellite-radio compatibility.

Declining flat-panel display prices “creates an opportunity to sell more audio,” he added. That opportunity “has to be driven by the retailer,” and although retailers have begun to more aggressively merchandise quality audio as an attachment to a video sales, "it needs to happen to a greater extent," Weissburg said. Retailers who have "made a concentrated display effort have seen nice increases."

Big-box retailers such as Best Buy and Circuit City, Weissburg noted, began this year to display and demonstrate one-price bundles of video displays and audio systems. They followed the lead of A/V specialists, who began creating their own bundles beginning in 2003 and 2004. At Tweeter, the attachment effort started "substantially" in mid-2004, and "it worked very well," said merchandising VP Dan Jeancola. "We have been strong in audio for six months."

As part of its effort, Tweeter incorporates component audio and video displays in one package at a single price, including cabling and installation that in some cases includes in-wall or on-wall speakers. Consumers, however, can opt out of any piece.

The packages simplify and speed up sales presentations, Jeancola said. "Before, it took three to four hours to discuss each component and cable."

Jeancola believes the falling prices of flat-panel displays will help buoy component sales, but others aren't so sure.

Wargo said video display prices might still be too high to free up much money for audio. Flat-panel prices "are still higher than what the average consumer spends annually on consumer electronics, or about $1,500 per year," he said.

Suppliers and retailers nonetheless see the potential for increasing the attachment rate, and to that end, Sony plans the industry's first campaign by an electronics supplier to tie audio sales to HDTV. Sony plans a second-half advertising, promotion and retail-merchandising effort dubbed Sony HD Audio — Hear The Big Picture. The campaign will include ads on NASCAR TV programs, NFL broadcasts on CBS and other TV shows.

Hot sellers: Whatever the industry's success in raising attachment rates, select segments within the component market will fare better than others in the second half. The winners include receivers priced at more than $1,000. Weissburg expects receiver sales to grow at prices of $1,000-plus in 2005. Other marketers believe sales at those prices won't shrink as much as the overall receiver market.

Sony's Abram forecasts strong second-half receivers sales in $1,000-plus models that feature second-zone output, up-scaling HDMI outputs that also carry audio, and out-of-the-box ability to integrate with distributed audio systems and custom home theater. At $800 to $1,000, a high-performance amp and a smattering of custom features will drive receiver sales, and below $500, receivers will have to offer a high price-to-performance ratio and the ability to up-convert video to component output, Abrams said.

To address the $1,000-plus market, Sony will add a new price point of an everyday $2,000 with the introduction of the 7100ES receiver with powered second zone, third-zone output, two remotes and HDMI "done the right way," Abrams said. HDMI done the right way means it carries multichannel audio, not just video, he said.

Satellite-radio compatibility will also play a large role in receiver sales in the second half. Yamaha offers about eight XM-compatible receivers priced down to a suggested $229, and it plans XM-compatible HTiBs. Denon shipped its first XM-compatible receiver in the first half and plans more in the second half. For its part, Marantz will enter the XM-ready arena with a product configuration that it declined to disclose.

In component speakers, the only bright spot is architectural speakers.

D&M's Weissburg expects architectural-speaker sales to grow, but overall speaker sales will remain flat when enclosed speakers are factored in.

Klipsch's Jacobs, on the other hand, forecasts growth in the combined architectural/box-speaker market, with combined sales rising 10 to 15 percent in 2005. Traditional-looking box speaker sales will probably decline about 10 percent, but sales of architectural and special-application speakers, such as plasma-friendly models, could rise as much as 20 percent, he said.

Jacobs blames the rising popularity of HTiBs as the major reason for declining box-speaker sales. HTiBs achieved almost $1 billion in retail sales in 2004 compared to box speaker sales of less than $500 million, he said.

Within the box-speaker segment, "big square boxes" aren't selling, Jacobs added, but stylish speakers that integrate with a home's décor are.