By Lisa Johnston
New products on display at the American International Toy Fair, held in N
Analysts covering the TV manufacturing industry said Philips' recent decision to license off the North American TV brand rights for Philips and Magnavox to Funai (see full story on p. 19), made sense for both companies, at a time when panel supplies are tightening and finished-goods margins continue to shrink.
Ross Young, chief research officer of The NPD Group's DisplaySearch, said the deal "gives Funai a chance to improve its position with retailers and makes them more important to panel suppliers, which should help their position and reverse their share loss. Philips will earn a profitable revenue stream from the license of multiple brands instead of suffering significant losses in its North American TV business."
According to DisplaySearch, both companies lost share to Samsung, Sony and Vizio in 2007. For flat-panel TVs on a unit basis, Philips-plus-Magnavox fell from 12 percent to 6 percent from Q4 2006 to Q4 2007 while all of Funai's brands — Funai, Sylvania, Symphonic and Emerson — combined fell from 8 percent, to 5 percent.
"Combining the Funai and Philips brands gives Funai more scale and more bargaining power with panel suppliers," Young observed. "It also gives them ownership of a high-end brand, something they don't currently have, and access to Philips' R&D. The Philips brand combined with their low-cost manufacturing approach gives them opportunity for improved margins."
Young added that ownership of the Philips brand in North America as well as multiple value brands should allow them to get larger, multi-tier assortments with retailers.
Young called Funai a cost-competitive manufacturer with its own panel module and TV assembly facilities.
"They try to buy incomplete panels (cells) and do the module assembly themselves to lower their costs and improve their supply chain efficiency, reducing inventory costs," he noted.
Riddhi Patel, iSuppli television systems principal analyst, called the move a positive step for Funai because it will add major established brands to its portfolio. According to iSuppli, the combined share of the Philips/Magnavox brands in the North American LCD TV market in 2007 was 8.3 percent and the total shipments were 1.8 million units.
Patel observed that Funai was manufacturing TV products for Magnavox prior to the brand licensing deal, and "this will further strengthen Funai's position in the market."
Patel said she expects Funai to continue carrying its existing lines along with Philips and Magnavox going forward.
"They may use Philips technology to keep [Philips-branded products] as a premium product lineup with the other brands making up for the value category," said Patel. "As for the channels of distribution, they may maintain the existing ones and leverage the relationships to further the other brand in each of the channels."
Patel said she believes Philips made the deal because it "is suffering financially and is trying to disengage from their displays [joint ventures] to ensure profitability."
Intense pricing competition on TVs in North America has made consumers less inclined to pay a premium for additional features, she said.
"In this deal, Philips will not have to deal with the manufacturing, procurement, distribution, marketing or sales — they will get royalties for the use of the brand name."
The Philips brand "was faring well in terms of shares in the past three quarters but did see a decline in Q4 '07," she said, adding that company has long offered good technology but has never been a very strong brand in the United States.
Tamaryn Pratt, Quixel Research principal, called the deal "a good relationship from the Philips vantage point."
Pratt observed, "The company metric is on profitability, not the TV market share game. Unfortunately, the TV business is shaping up to look like the computer monitor business where shrinking margins and low cost of operations are the rule, which is why we have a quarter of the monitor brands we had 10 years ago. Traditional CE companies have higher costs just to keep the lights on, so it is a great deal if Philips can license their brands and stay ahead of the shirking margin game. Let the players with lean operations play the game."
For Funai, she said, "Over the past several years the collective Funai brands have been very successful in the LCD TV screen size segments below 40 inches, and on a quarterly basis continue to amass a significant overall market share in the USA. This might not seem obvious because they market under several different brands and tend to stay under the radar."
Pratt said the deal makes sense for Funai from the standpoint that "the mass merchant channels Funai operates in so efficiently are beginning to increase their share of the 40-inch-plus flat panel market. Until now, Funai didn't have much of a large-screen offering with their current brands, but with the Philips and Magnavox brands they have a full portfolio of products/screen sizes and they can effectively be a 'one-stop-shop' for their retail partners in the value space. Also a positive, in theory, is Funai's ability to have more control over panel supply and keep costs down. However, this is providing that the Philips and Magnavox brands maintain share in the large screen size segment, which takes marketing and innovation efforts — aspects we don't traditional peg to the value players."
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