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Audio Roundtable: When Is The Rebound Coming

12/30/2009 12:01:08 PM Eastern

Las Vegas
-- The economic downturn and the loss of specialty retailers over the years
have taken a toll on the audio component business.

Last year, factory-level component sales might have fallen below
the $1 billion mark for the second time since CEA
began collecting statistics in the early 1980s. Projections made last July by CEA called for 2009 sales to drop 11 percent to $943
million. In 2003, sales plunged below the $1 billion level for the first time
before rebounding past $1 billion the following year. Component sales peaked in
1990 at $1.93 billion, the statistics show.

Products that have withstood the economic downturn better than
others deliver value and simplicity, various suppliers say. Soundbars and
surroundbars are one example.

Here's what else a panel of industry executives have to say about
the state of the industry in 2009 and 2010.

Paul DiComo Paul Jacobs Bob Weissburg,

Doug Henderson Gordon Simmonds  Dave Bales

The panel consists of Paul DiComo, marketing VP, Definitive
Technology; Paul Jacobs, president/COO, Klipsch Group; Doug Henderson, sales and
marketing VP, B&W Group; Gordon Simmonds, managing director, Lenbrook Int.
(NAD and PSB); Bob Weissburg, president,
D&M Sales and Marketing, North
America; Dave Bales, home audio
marketing and product planning manager, Pioneer Electronics.

2009-2010 OUTLOOK

TWICE: Assess the state of the audio components market
in 2009 and 2010.

  Henderson:
2009 will be another down year, although recently [as of November] we are
seeing signs of improvement. Clearly, the economy remains challenging, and
although there are signs of improvement in housing, this has been slow to
translate to new CE business. Retail traffic remains soft. We are forecasting a
slow start in 2010, which we feel is the only responsible plan, with the
expectation that a sustained turnaround may not happen until late in the year.

Jacobs: The economy is the factor shaping near-term
growth. It's what led to the demise of Circuit
City and Tweeter, as well as new
home construction. Consumers are reevaluating where they shop and how they
spend their money. By taking the time to serve these consumers with affordable
high-quality products, our industry can take advantage of some clear growth
opportunities. These are extraordinary times for all of us, and the companies
who continue to do business as usual have little chance for survival.

Klipsch has had to shift its business model in order to conform
to the changing realities of consumerism. We're constantly reevaluating and
implementing strategies to keep us viable in this market.

 During 2010, I think there
will be some growth with the unemployment rate stabilizing. This will give
consumers a little more confidence, and hopefully open up some discretionary
income for them to spend. Other factors that might spur growth include products
coming to the end of their life cycles, a focus on high-quality home life,
product innovations, and consumer boredom.

Simmonds: It certainly appears that the overall audio
market has been impacted both by the economic uncertainties and the loss of
some great independent dealers over the past several years. For NAD Electronics
and PSB speakers, we foresee modest growth as a
result of our focus on fewer but more committed dealer-program initiatives.

Bales: Over the past year the industry has endured many
hardships due to the economic downturn. The closing of Circuit City
and Tweeter certainly added to the overall sales decline. In 2010, however, we
expect a slow growth and improvement in the general home audio component
market.

For Pioneer specifically, while the entire industry declined, we
maintained our market share in A/V receivers and even grew our market share at
certain price points.

Weissburg: The home audio business was definitely impacted
by the demise of Circuit City and Tweeter. When more than 700 stores
stop selling and promoting the category, demand for products is diminished.
Recently (as of early December) the retail side of the audio business picked up
compared to earlier in the year. NPD indicated that the receiver market had
been trending down as much as 23 percent, but we have seen a nice recovery; in
fact, in October the overall market grew by 4 percent  compared to the previous October.
Overall we see the on-line and retail sides of the AVR
category steadily improving as we head into 2010.

The custom market is another story. This segment of the business
has been hard hit, especially in audio components and custom speakers. There
are definite signs of recovery in this channel, but I don't expect a measurable
rebound for several months. The CI market should improve slightly in 2010.

TWICE: What segments
within the audio industry showed growth in 2009 and will in 2010?

Henderson: We added
our first soundbar, called Panorama, in 2009. It is at the top of this category
in terms of retail price at $2,200 and has sold through exceptionally well.
Panorama demonstrates that consumers are still willing to pay a premium for
superior performance and styling.

Simmonds: We are actually seeing growth in our two-channel
audio business. The smart dealer is recognizing that "upselling" consumers to
better music systems is a wise way to capitalize on the increasing interest in
music driven by MP3/iPod accessibility. These dealers recognize that they had
become increasingly dependent on sales of low-margin video displays, where they
have no differentiation, and need to get back to the roots of their success.

Bales: While
the overall component business was down in 2009, we saw significant growth,
specifically in our A/V receivers with iPhone certification, due in part to the
proliferation of iPhones. There is very strong demand for iPhone compatibility
as more and more consumers are looking to integrate their smartphones into
their home theaters without sacrificing their ability to be reached.

In 2010, we expect growth in the soundbar category, which we are
entering for the first time. Soundbars offer the opportunity to deliver a
high-performance, compact speaker solution at a lower price point for small
living rooms or secondary-room applications. Our new soundbar offers a 3.1
channel system with a wireless subwoofer engineered for critical listeners.

We also believe home networking will be a huge trend for 2010.
Last fall we demonstrated a networking concept technology called Project ET
that encompasses high-quality audio and video playback, Internet access and
home theater control capabilities. The concept would allow consumers to combine
their personal music, movies and photo collections on a built-in hard drive, as
well as provide access to a choice of online content services, social
networking applications and purchasing sites -- all within a single set-top
device. This is a concept technology that we believe represents future
networking solutions that can be expected over the next year.

Weissburg: Even though this year was a challenge for audio,
there were a number of bright spots that generated a lot of business. The new
audio formats in support of BD brought consumers back in the market. This
purchase process begins with a new flat panel HD TV, then a Blu Ray player, and
a new AVR completes the HD experience. By
including room correction technology, multi-zone capability, networking and access
to content anywhere in the home, we are generating a great deal of interest
from consumers. They are finally seeing the AV receiver as the control center
for the entertainment experience at home. Home networking is also becoming more
understandable by enthusiasts who want access to content online, and off their
PC, in a seamless way. This is just the beginning of this new access to
content. The AVR will continue to play a major
role in managing the home entertainment system

The other category that's noteworthy is the sound bar. Consumers
quickly realize after getting their new flat panel TV hooked up at home that the
sound quality is generally disappointing. Dealers who spend time following up
with customers who bought only a television will find quickly that an addition
of a sound-enhancing system will be a pretty easy sale. In this environment of
low margin TV sales, I'm surprised more retailers aren't marketing to this
customer segment, which has a desire for better sound from their TV. If you
read the reviews online regarding new TV purchases, the majority of consumers
point out the poor audio performance. This spells opportunity to any savvy
retailer for component and HTIB sales. 

PROGNOSIS FOR LUXURY, HIGH-END

TWICE: How have the luxury and high-end segments of the
audio market held up?

Henderson: The
high-end segment, like every other segment, has struggled in 2009, but we
believe will it bounce back more quickly as the economy recovers. The wealthy
are still wealthy.  There has been trend
toward a thinning of brands, which we believe is healthy for the overall market
long-term, and we expect this will continue in 2010. Brands that truly offer
value and the strength to stand behind their dealers and consumers will eventually
benefit from this inevitable shakeout.

Jacobs: High-end luxury audio has suffered as expected.
However, there are still some segments performing well, such as the higher end
5.1/7.1 THX surround products. Two-channel has
not grown, but some areas have performed better than anticipated. In my
opinion, 2010 looks to see growth in both segments.

DiComo: I can't speak for the entire speaker industry, but
for Definitive the high-end segment held up very well [in 2009] and in fact was
well up over 2008. We aggressively advertised our Mythos STS
system ($4,500 MSRP) and are in the midst [in Q4] of a sell-through promotion that
is working for us very well. The dealers who chose to participate in the promotion
put an emphasis on merchandising, signing and demonstrating the system and are
having great success. I think it shows that well-heeled consumers will spend if
you give them a reason to, and if you put consistent focus on a category you
will be rewarded.

Simmonds: We are finding that even the well-heeled
consumer is looking for better value in their purchases. Since our brands are
the "poster child" brands for affordable high end, we are increasingly becoming
a "go to" option for consumers who see "value" as the "new cool."

Weissburg: The high end of the audio market has held its
own during this recession. Overall this segment went through a slowdown earlier
in the year, but we see a definite improvement in the current and future
bookings of luxury gear. I wouldn't say happy days are back, but we are seeing
increased demand for higher end more expensive gear, especially for McIntosh
and high-end Denon and Marantz BD players.

HOW TO CREATE AWARENESS

TWICE: Is iPod
connectivity in components and HTiBs enough for audio suppliers to capture the
hearts and minds of the younger generation?

Henderson: We have
had phenomenal success with our Zeppelin iPod dock [tabletop speaker system],
just now followed by the Zeppelin Mini. As with our Panorama soundbar, we aimed
to bring a higher level of fidelity and style to a category dominated by
mass-market vendors.  If not for the
design and engineering skills developed over the past four decades with
"traditional" freestanding speaker systems, we could not have created these
products.

  Jacobs: In my
opinion, connectivity isn't enough for kids, but it's a great feature for
adults. If you want to reach kids, you have to design a product they want. I
watched the success of the iPig in

Bales: The
popularity of the iPod and now the iPhone have made the A/V receiver a
cross-generational product, as the younger generation looking for home theater
A/V receivers are turning to those products that seamlessly integrate with
their iPhones.

We also believe that there is a growing market for standalone
iPod/iPhone audio systems and plan to introduce high-performance tabletop sound
systems in 2010. We believe that consumers prefer high-performance audio
technology in all applications, including home theater and beyond. 

TWICE: The 12-volt
industry is launching a consumer-awareness campaign. Should the home audio
industry do the same?

  Henderson:
Yes, this would be a good idea. We have done something similar on our own
called the Society of Sound. Most people have never experienced authentic high
fidelity audio. This is not true only for young people, as is often said; it
spans all generations. The flat-panel revolution also diminished audio's
prominence in recent years, but there is always an opportunity (and now a need)
to shift the conversation back. People love great sound when they hear it. That
hasn't changed.

Simmonds: Yes, it would be a major win for our specialty
industry to recognize who we are actually competing with for our consumer's
purchases and to market our better sounding solutions together! Another major
challenge for our specialty industry is the education and training of the next
generation of sales specialist to help this new customer understand the
importance of foundational issues like proper amplification, speaker and
speaker set up. We need to recapture the lost art of a great demonstration to
show our difference and connect customer's emotions to our products. Brands and
dealers that show leadership in this part of the sales chain can greatly
benefit.

Bales: Certainly. However, given the current financial
constraints that every CE manufacturer faces, more creative ways of educating the
market must be implemented.

 Last year we launched The
Source to educate our dealer base, which will in turn help to educate the
buying audience. The Source is a dealer training and support website that uses
a social networking format. It allows Pioneer dealers, distributors and
national retailers to find timely and relevant Pioneer information anytime and
from any location. Visitors can participate by watching educational videos,
taking product quizzes, direct questions to Pioneer national trainers, research
news and industry trends, discuss topics on forums, obtain product support
documents, and even download custom installation codes.

Weissburg: Realistically, I don't think we need an
advertising campaign to bring attention to home audio. The retailers in the A/V
specialty, electronics super store and e-commerce channels have to focus on
audio as a category all on its own, not just an add-on to a TV.

I have seen some dealers this year take advantage of the downturn
and capture market share in audio by dedicating financial resources and people,
and upgrading their mix of products, to put a stake in the ground on driving a
profitable businesses. Other successful dealers that have always been dedicated
to home audio haven't relaxed their visibility in the market. Consumers are no
less passionate about their music or entertainment requirements compared to 20
years ago; they just have many options available to them to enjoy it. I think
some segments undersell the market by offering consumers "good enough sound"
products and de-emphasizing the importance of better audio. The good news is
there is a huge segment of the population that wants a better home
entertainment experience; the industry needs to get re-energized and focus
around this opportunity.