TWICE Retail Roundtable Tackles Range Of Industry Issues

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Last month during International CES, eight leading merchants, one buying group director and an industry analyst were cloistered with TWICE in a Las Vegas Hilton conference room.

The ensuing 90-minute discussion, recorded for posterity and presented here in edited form, touched on every major issue impacting the CE business, from Wal-Mart and Black Friday to TV and DVD format wars. When and where will flat-panel prices plateau? What's behind the resurgence in home audio? Will consumers abandon DVD for streamed and downloaded content, as they have with CD?

Our Roundtable panelists couldn't resolve all of the big questions in an hour and a half. But their thought-provoking debate on the challenges and opportunities facing CE retailing makes for compelling reading.

TV Talk: Plasma Vs. LCD — And Don't Write Off Projection

TWICE: How much longer can the industry ride the HDTV adoption wave?

Mike Vitelli, Best Buy: High-definition penetration is 25 percent. Millions of $200 televisions are still being traded. Even if they are only being replaced by $1,000 sets, that is a fivefold increase. There is a tremendous amount of people who have not even begun to enter the market yet.

Ross Rubin, NDP Group: There was an interesting crossover last year on the 32-inch screen as well. On the low end, prices were $600 to $700, which put it in competition with high-definition 32-inch CRTs from premium brands. This past holiday season was perhaps the first where people who could not buy a flat panel in that size may have now been able to afford a second-tier or third-tier LCD television.

Rick Souder, Crutchfield: Most of us in this room can probably remember the first time the industry sold 1 million $2,000 sets, and what a big deal it was. Now it is 10 times that. We are in that range and I believe that is good news.

While I agree that prices will stabilize, the bigger challenge is where they will stabilize. Will they drop dramatically below $1,000? That does not appear to be the case.

TWICE: CEA president Gary Shapiro said that as average selling prices on flat panels fall, attachment rates also come down. Has that been anybody's experience?

Joe McGuire, Tweeter Home Entertainment Group: On our promotional items, such as $1,199 and $1,299 42-inch plasmas, particularly during Black Friday weekend, the attachment was half what the company's normal attachment was. After those four days, the attachment bounced back rather quickly. We saw that perhaps more clearly this year than in the past, and it was eye-opening.

I believe his quote was very accurate. There is a group of customers that views this weekend as a type of sport that engenders unique behaviors in a relatively short timeframe. However, during the time we were very promotional, price-focused and driving traffic, the customer was also very price-focused and not as prone to attachments.

Vitelli: I believe what Gary was talking about is even broader. It is true there is a relationship between the attachment basket and the individual unit. If you buy a $5,000 television, the things you put around it are generally going to be more expensive. If you buy a $500 television, the things around it are going to be commensurate with that.

There are also many more attachments needed for a high-definition set than there are to analog televisions. And when the television itself is more affordable, people are more amenable to doing things that they actually have to do anyway. These things include a high-definition source, a sound system, installation and all of the things that give them the experience they want in the first place. When the set is $3,000, they are less likely to be able to do that.

Certain things are being sold faster, such as installations, high-definition services and DVDs. These attachments keep the product sold because people see something similar to what they saw in the store vs. an analog feed on a high-definition TV, which is not a good experience.

Souder: Over the years there has always been [promotional] activity on tier-three brands, but last year it was much more intense with the prime brands. That is a fundamental shift that the consumer will benefit from. On the flip side, it raises the challenge to the supplier community of how to manage the increasing numbers of channels and distribution points.

Dave Workman, PRO Group: That speaks to the optimism for 2007, because there were a lot of panels put into the marketplace. To Mike's point, it is one of the most attachable sales out there, perhaps the same as the iPod. If we reached a new consumer, the challenge for all retailers is how to complete that sale because clearly, satisfaction with the product does not come until that time.

The nature of promotional activity during the holidays means more people buy only a set. However, by keeping the set in the field and keeping consumer satisfaction high, we should see nice growth with the follow-on products.

TWICE: The consumer seems to have voted for LCD. Why? Are you pushing them?

McGuire: No. At Tweeter, we marketed plasmas more heavily than LCDs, and we still sold more LCD sets than plasma sets. We had net fewer plasma sales in the month of December last year than in 2005. We certainly did not expect this, particularly given what happened to the price points.

With our higher-end customers, we found that where somebody had a trade-off between a 46-inch 1,080p or a 50-inch 720p plasma, they were choosing the 46-inch 1,080p, which was a significant driver.

Randy Wick, Circuit City: I agree with Joe. We see consumers taking advantage of 50-inch plasma or stepping down to 46-inch 1,080p. We were involved in plasma before many others, and we still see good growth. In our opinion, there is no question that 1,080p has fueled LCD.

TWICE: Does the consumer understand what 1,080p is? Do they know why they want it?

Wick: Yes, they do.

Noah Herschman, Our top sellers have included all three technologies, depending upon price. The technologies are pretty much all-pervasive and, while not interchangeable, they all provide very good pictures, better than what consumers are used to seeing.

Vitelli: The LCD industry is 10 million units and the plasma industry is 3 million units, so you are going to sell more LCDs because there are more. As Joe and Randy said, people know about 1,080p.

The customer's decision will depend on where the TV will be placed, whether in a dark room or a light room, in front of a window or not. If these things can be easily explained to the customer, the decision is easy because both flat-panel pictures are spectacular — there are only minor differences between the two.

Rubin: In regards to attach rates, it is also a good example of the tail wagging the dog. Clearly, a 1,080p broadcast is nowhere on the horizon. It has been because of Blu-ray and PlayStation3 that this issue has entered the TV buyer's consciousness. It is also interesting to see the demand for the 46-inch sets because even proponents will easily admit that you only start to see the difference between the two resolutions on 50-inch sets and larger.

Herschman: It is not about that. It is really whether you are an early adopter, the person who has to have the latest and greatest thing. It's easy to say something is 1,080p vs. 1,080i — that's easy to explain to your neighbors. Our sales are very good at Amazon because we cater to those early adopters.

Workman: Jessica Simpson does a commercial for DirecTV where she says, "A 1,080p? I don't know what it is, but I want it."

Souder: That's a good point because the consumer does not want to compromise. I may not know what I am getting, but I know I don't want less than the best.

Workman: The average consumer remembers they had their previous TV for 10 or more years, and this is more money than historically people have ever spent on a television set. Therefore, there has been a shift in mindset and the tendency is to future-proof as much as possible, which bodes well for attachable products.

In addition, people are still in love with flat panel the same way they're in love with their Apple iPods. Flat panel has become very fashionable, and fashion sells add-ons and accessories because it becomes a statement within your home and about your lifestyle.

TWICE: Can somebody please tell me why microdisplay has cratered as quickly as it has? It still represents a great bargain for the consumer when you look at the amount of screen real estate they're getting for the price.

Workman: It's not sexy.

Vitelli: I told a story here last year that resonates with many people. I was pitching my wife Jodi on a JVC HD-ILA projector but she looked at the Pioneer Elite on the wall and she said, "Why aren't we getting that?" That is what we ended up getting.

When a consumer walks in to buy a high-definition TV, he is only looking for permission. Not only are we getting permission, but we are getting upgraded to something sexier. When it comes home, it is an addition to the home, not a detraction.

Workman: Even two years ago, the cabinets were unattractive and outdated. Now the manufacturers are putting a great amount of work into industrial engineering, a la Pioneer Elite. All of this technology is great and you literally have to train people to see the differences, but they can see the differences in a cabinet right away. I believe you will see different demarcations of differentiating good, better and best. It may not necessarily be all about the picture. It is fashion.

Herschman: The cabinets are beautiful with the DLP and the Sony sets too. At Amazon, our customers generally discover the products on their own. Because our projection TV set sales are very robust, I wonder if the choice between plasma and LCD is influenced more by the salesperson than the customer. If we are to be the harbinger of true customer demand, we have not seen that change as dramatically as perhaps others around the table have.

Vitelli: I know two people who have Sony LCD rear-projection sets and they think they have a Sony LCD TV. The technologies are very similar and hard for people to discern — they simply do not know.

Rubin: That's the reason NPD doesn't survey consumers in the TV business.

McGuire: For two quarters Tweeter has led the industry in projection television decline. However, we continue to see stable velocity in the projection television business in large-format 1,080p product, which caught us by surprise. But we are having a hard time giving away 720p product.

Herschman: In November microdisplay was up 21 percent industrywide in units and down 12 percent in dollars because of the ASP. However, the tide was rising because LCDs were up 125 percent and new plasmas were up 100 percent, so it is comparative.

Rubin: There has been a slight shift where DLP and SXRD maintain at least part of that momentum at the expense of the 3LCD and obviously CRT-based rear-projection sets.

Workman: I believe you have to combine all of the varying technologies and examine the total TV business. There are going to be shifts, but the total business in televisions above $1,000 is at an all-time record.

Although form factor does play a role, consumers are choosing varying types of sets for varying applications. The microdisplay sets do lend themselves to the biggest picture — LCD and plasma both have the relative form factor advantages. The good news is the customer has a lot of great choices, which means we should hopefully beat the odds and perhaps get slightly more growth out of the business.

Herschman: It is based on application. For example, if you have an existing media center, flat panel pops in and looks great.

Workman: I like the fact that some manufacturers are now beginning to look for niche applications to build unit volume, such as armoires that fit a 36-inch TV. Hopefully we will see a microdisplay product that slips in and gives a bigger screen. That could potentially be 200,000 or 300,000 extra units for the category.

TWICE: With LCD gaining momentum, what role will plasma play in the long term? Will it become a niche product?

McGuire: I don't know if it is going to become a niche, but I do not believe plasma is going away. I think it will continue to be pretty significant, but in the next 24 months, I believe you will see plasma and LCD battling for share. Manufacturers in both camps have created enough capacity to produce millions of sets per year.

TWICE: So we're talking more price volatility?

McGuire: Yes. The question is: How will that manifest itself over the next 12 months? There is capacity for both, with a plasma factory and two LCD factories coming online in the spring.

Herschman: The good news is that all DVDs play on either one.

Vitelli: We also need to stop talking about LCD as one giant category. We need to pick 37-inch and above, and then compare that to plasma. Those are comparable — the smaller LCDs are not.

Workman: They are the 19-inch and 27-inch sets of yesterday.

Vitelli: At Best Buy we started looking at 37-inch and larger LCD and plasma as a completely separate category from everything below it.

MP3, HDMI Spurring A Resurgence In Home Audio

TWICE: Now that flat-panel prices have cratered, will the consumer divert some of his savings toward better audio, to compliment his new HDTV?

Dave Workman, PRO Group: You must consider audio as a different category. Frank Sadowski once made a very insightful statement here about the shift caused by MP3. iPod represents more than all of the other component manufacturers and then some. The consumer is telling us that form factor and functionality are important. It is simply a question of how we bring those to the consumer and excite their imagination vs. focusing only product and price.

Dan Schwab, D&H Distributing: Video also drives audio.

Workman: Yes, but more slowly. We have great product, and bringing it to life has always been the biggest challenge. People get fixated on a price and a product, but in reality, success comes through the experience.

Mike Vitelli, Best Buy: That's a really good point about MP3s. A lot of people ask us about our CD sales, which are down 15 percent. CD sales are down — however, our total consumption of music is significantly up, whether with satellite radio, MP3s and related accessories, or receivers.

Noah Herschman, Companies like Sonos also have a vision for this, with the Rhapsody subscription enablement. It really is a great piece that is easy to hook up, and I think manufacturers will come out with similar products this year, which will continue to drive business up.

TWICE: Which components are leading the revival of traditional audio?

Rick Souder, Crutchfield: In speakers, the hot categories are in-wall or in-ceiling speakers, architectural speakers, as opposed to the box standing next to the television and bookcase. Various component receivers have also come back. I think there is new interest in audio because the content is easier to access now, whether that is driven by home theater or mobile devices.

Joe McGuire, Tweeter Home Theater: Many of us are seeing a lift in receiver sales and I think there are two things driving that: iPod connectivity and HDMI switching.

Mike Vitelli, Best Buy: Devices connected to your TV by HDMI are the central nervous system.

TWICE: When they are able to connect.

Vitelli: Yes. We are struggling on that point, but I think we will get there with HDMI.

TWICE: Do you think you're getting a significant amount of returns due to failed "handshakes" between HDMI-connected devices?

Vitelli: It is an issue, but I don't believe we can isolate it that specifically. We want devices that are HDMI compliant so we know that they are going to work and they have been tested.

McGuire: We literally have people in a room testing the HDMI devices, and we now have a database of products that should not be paired. It's not a long list, but certain manufacturers do not work well together.

Ross Rubin, NDP Group: I cannot remember a time when consumers had to think about the port version number on their consumer electronics. We have seen it in the PC with USB 2.0, for example, but never a dot release on a CE port.

Vitelli: We are going to try to force that issue a little bit more. To Dave's comment, you must look at everything from the customer's point of view. If it is simple, it will work. You know it will work, and you can recommend it with confidence, you can install it with confidence, people can use it with confidence, and they will come back for more.

TWICE: Component pricing seems to be somewhat shielded from the turbulence on the video side.

McGuire: Shhhh!

Vitelli: Don't write that!

Dealers Differ On Merits Of Potential XM-Sirius Merger

TWICE: How has satellite radio been performing?

Ross Rubin, NPD Group: We have not seen the explosive growth that we saw last year. There is a lot to be said for the Howard Stern effect, which we ended with last year.

But we are seeing diversification in satellite radio where it is moving into the home more, with more portable units, XMToGo, and so forth. In terms of the core receiver business, we did not see such strong growth and, in fact, I believe we saw some declines throughout the year.

Dave Workman, PRO Group: Is the major growth area of the business also shifting quickly to OEM? That has to be viewed as two stories — OEM is growing and retail is not, even though we have new form factors and new utilization.

Jonathan Magasanik, Sears Holdings: OEM is dominating. One channel grew and the other channel did not.

Mike Vitelli, Best Buy: As a consumer, it frustrates me that they are making a choice that will radically differentiate what content I am going to listen to. If I am a sports fan, I would need both [services] because they split the sports industry between the two of them. Some people may not be able to afford that and therefore, not do anything. It would be interesting if they could share content differently if they were not the same company.

Joe McGuire, Tweeter Home Entertainment Group: Does that become one?

Vitelli: That is an option that they might want to consider. A combined company would be better because consumers would be able to have everything.

Dan Schwab, D&H Distributing: If you had two choices, a lot of people would stand on the sidelines.

Magasanik: I think the net growth would be better as one company, although we would be all very unhappy if there was only one.


Magasanik: Because their economic model is to try to accumulate activations, so they incentivize us to move their products.

Workman: As growth slows down, however, the reality may be that the only viable business model is to have one company.

Vitelli: I do understand your point, but at least for the next several years I believe the bigger competition will be a free vs. paid environment, rather than which paid environment.

Noah Herschman, We should not underestimate HD Radio, as it could be a really great thing for the customer. I think Mike is correct in that there could be competition between free and paid, especially if there are more products from the manufacturers based around HD Radio. There seems to be a lot of support now from the radio stations so there will be a lot more selection for the customer.

Rubin: They could even create paid, subscription-based, multicast stations on HD Radio. The wireless technologies are such that you could reasonably start offering new premium radio services into the vehicle over cellular technologies.

Magasanik: Content is ultimately king. HD Radio is great when you are in a market where somebody is broadcasting the game or event that you want. For me personally, when I am in Chicago, I cannot find a New England Patriots' game on a Chicago radio station. If I flip on Sirius Satellite Radio, I can get it.

There are reasons that we have choice. Again, it goes back to how the customer wants to use it. My parents wanted satellite radio because they drive from Massachusetts to New Hampshire and they want to be able to maintain their classical musical station without changing the channel. It seems somewhat petty, but the fact is that the consumer is looking for simplicity. Different people want different solutions — that is why we have choice. It is incumbent upon us to present the features and benefits around the choice.

That is truly what retail is about at the end of the day. We take this plethora of choice available, synthesize it, streamline it and make it understandable for the consumers so they can make a choice. If we homogenize everything down to one, ultimately the retail channel does not play a strong purpose. I think we have a strong role and we must be able to successfully present to the customer so they can make an educated decision.

Digital Cameras Getting 2nd Wind With SLRs, New Feature Sets

TWICE: Have digital cameras reached their saturation point? And has the consumer maxed out on megapixels?

Ross Rubin, The NDP Group: I believe the megapixel race is beginning to wind down. However, manufacturers are finding ways to move the category forward, with features such as image stabilization, which was popular last year. Obviously, digital SLR was also a very popular subcategory last year. For many of the people with analog SLRs, the d-SLRs have come down to the point where they have become an affordable option.

TWICE: Digital imaging has got to be a huge category for Amazon. Noah, have you seen any changes in the business?

Noah Herschman, Digital cameras are consistently at the top of our weekly top-seller lists. However, as Ross said, we are seeing diversions. Digital SLRs have been a huge business for us with the launch of the Sony Alpha and others models from Nikon and Canon. This business is very robust because prices are great and there are many customers who want to upgrade their camera.

Dave Workman, PRO Group: All of the success in digital imaging has still not translated to the camcorder business, which has been flat-lined for the last five years. Perhaps high definition will help that category as well.

TWICE: Have hard disk drives, flash memory and MiniDVD had any effect?

Workman: There are niches that exist, but overall, the camcorder business has not shown the same level of strength or growth.

Magasanik: One reason for this is the way the digital still camera is used. The biggest use is to take a photo and e-mail it to grandparents. The camcorder is not being used so simplistically. Customers are not going to upload a soccer game that they recorded with their camcorder.

Even with still photography there are statistics available about the number of photos that have been taken vs. the number of photos that have actually been printed. Many people cannot get them off the camera or PC. The same dynamic is true with the camcorder.

Workman: It may become applicable someday with streaming video.

Ross, you described digital picture frames as a breakthrough category during the holiday season. That's where we start to bring form and function together to expand the utilization. That is the neatest thing for Grandma, to plug in a phone line and see photos of her grandchildren across the country.

DVD Format War: The Best-Laid Plans Of Mice And Manufacturers

TWICE: Would it be fair to say that the launch of the two high-definition video disc formats has been a disappointment?

Joe McGuire, Tweeter Home Entertainment Group: We collectively agree on that.

TWICE: If the consumer is so excited about 1,080p, as he's demonstrated with 1,080p LCD, what's the problem? Is it confusion?

McGuire: No. The consumer would love to have high-definition DVD, to have the content to play on their 1,080p TVs, to rent a movie in high definition. Clearly, consumer demand is there, but there is a window to sell high-definition content in a physical medium. If the industry does not take advantage of that window, it will close and move to a streaming format.

We are placing orders for Blu-ray players. As they come in, they go out, but they go to real enthusiasts. It is simply not going to be a massive mainstream selling opportunity until the format problems get solved.

Jonathan Magasanik, Sears Holdings: We cannot expect the customer to make a capital investment in something that may be the wrong bet. They want to go to their video store or their closet and pull out content that will work. It is a shame because they are investing a great deal of money in the TV and the panel, and they are losing the opportunity to view the content that could be there.

Dan Schwab, D&H Distributing: Aside from the Blu-ray ads and the actual technology, none of the retailers or video chains are promoting it. It's not being promoted because of the confusion and the limited selection available. It's on our minds, but the consumer is not even thinking about it. Salespeople are promoting other high-definition attachments because they don't want a dissatisfied customer. In some cases, they don't know where to point the consumer; there is no clear direction.

Magasanik: On the downside, I would suggest it has caused a decline in the sale of traditional DVDs and DVD players, which has hurt the industry. While people are waiting for resolution of the new platform, they have stayed away from the marketplace.

TWICE: It could also be that enhanced-definition DVD has reached the saturation point.

Magasanik: It could be.

Dave Workman, PRO Group: Specifically, it took out certain price points of DVD. Yes, there is a saturation aspect, but clearly, it created a negative and not a positive. High-definition DVD is a recent technology in the minds of many consumers, and consumers have said with their wallets that they love it. However, with many of the demonstration titles that came out, you had to look back and forth. In fact, much of the press has highlighted the fact that many high-definition titles are only marginally better, which is not enough to capture their imagination. If you put a format war on top of that, it is a recipe for disaster.

Ross Rubin, NDP Group: It is almost like SACD and DVD-Audio. It sounds familiar.

Mike Vitelli, Best Buy: If you polled us one year ago, it would be identical.

Randy Wick, Circuit City: I would agree with you. If the situation isn't resolved, streaming and downloading are going to take over.

Magasanik: I agree. There are clearly products coming, including dual-format players, which will not fix the problem. If two technologies are embedded in the device, there is obviously an associated price, which is passed on to the customer. While that may not reduce demand, it will prolong the problem.

Rubin: In addition, dual-format players do not solve the retail stocking issue for the content — you must buy both.

TWICE: What about Warner Bros.' dual-format disc?

Rubin: That is a short-term solution because now you must stock three formats.

TWICE: Jonathan, what do you think the sweet spot is for the high-definition player in terms of price point?

Magasanik: I don't know the answer to that yet. I believe it will be somewhat dependent on where the TV pricing stabilizes because there is a relationship there. As we have seen with DVD players, you can buy them for as low as $19.99 and you can go up as high as you want. There will be feature sets and differences that will create an assortment of products; however, pricing will not resolve until we resolve the overall macro issue.

TWICE: Dan, what if the industry does move towards streaming media, video downloads or video-on-demand?

Schwab: It hurts all of us. However, in some way, it creates a lot of opportunity for new entrants. Most of us are in the business of selling hardware, in some way, shape, or form. With music, the industry clearly did not react quickly enough and therefore, there was a paradigm shift where the consumer's purchasing habits and capabilities changed. That is the future where we are going with video, or at least the propensity exists.

As the pipe becomes bigger, as we have more ability to transmit high-definition around the home and on the go, it is dependent on our industry to create a consumer-friendly solution that we can all get behind. Right now, we have both arms tied behind our back because we don't know how to fight or where to fight. We are selling what we have, but we are not driving the technology.

As you mentioned Joe, there is a window of opportunity. It should most likely be the highest attach-rate product to these high-definition technologies. When people see their football games in high definition, they love it. People are going to start expecting that there is a differentiator. Even if they are not looking at the old DVD technology, they have seen the difference between analog TV and high-definition TV. I think in the consumer's mind, there is a direct correlation there.

Rubin: The similarities between what happened with the successor to the CD and what we are seeing now are uncanny, but there are two differences. First, what happened with music was very grassroots-inspired in terms of Napster. There was an influx of "free content" coming into the marketplace and that is really what up-ended the next-generation audio disc formats.

Second, many of the video-on-demand streaming services are far more managed. Hollywood is trying to be more proactive and therefore, the rights management is there. It is also debatable whether we will see hoarders of movies the way we saw with music, where files are small, where you can build a library and take them with you.

The usage dynamics are also somewhat different — the way the content is coming to market is different. However, over time, we cannot say what might happen to spur streaming or digital distribution.

Magasanik: There is one big distinction between movies and music — with music, consumers download single tracks. With movies, they download the entire movie, as opposed to one scene.

McGuire: In addition, most video downloads are television shows rather than movies.

One of the prime new downloads was the college football game, where you can watch every snap instead of everything in-between. You can watch the whole game in 20 minutes.

Customers continue to want their content where they are. They do not want to go to the content. All of the technologies we have been talking about — WiMAX, new devices, high definition, streaming in the home, Sonos' Rhapsody solution — are about enabling a customer to access content where they are, as opposed to where the content is.

It is a fundamental shift, which is partly why you have seen Tweeter, Best Buy and Circuit City launch services. Everybody says this is a brand-new business, but there is no choice. If you want to sell a product and not have it come back, you must provide the service. Today, most people integrate their purchases into something else.

There is always this lag between when the technology moves and when people catch up and become comfortable with it. That seems to be accelerating. As mobile devices continue to grow, people are still going to want to access their content. The infrastructure is available today, but it is not easy to access.

Rubin: There are a lot of moving pieces. While consumers want the flexibility to access their home media, you still see service providers try to deliver canned content, where they manage and distribute it. That is the only way they can feasibly make it work.

Noah Herschman, I think customers will use content the way that they feel like using it. Downloading is a very successful endeavor right now, with 1 billion songs downloaded from iTunes.

Rubin: That is because it has been simplified.

Herschman: I agree. We have launched our own video download service called Unbox, but we still sell a lot of DVDs too. Customers are going to get content the way they want to get it, depending upon where they are and what they want to do. I don't think it's a bad thing if downloading becomes bigger. The customer is going to win and we will sell a lot of hardware.

Workman: In the absence of HD DVD, for example, I think there is a risk of getting a closed system that dominates and causes the margin model to shift to one that does not involve traditional retail. We have a window in which to establish a viable alternative.

TWICE: Dan, what are you advising your customers? Are you placing any bets as far as a technology and distribution model?

Schwab: No. Similar to retail, we are reticent to point anyone in a single direction. The challenge we face is trying to offer all of our partners — retailers, dealers and e-tailers — the latest technologies. The merchants want the things they can use to differentiate themselves.

Conflicting technologies are often good for the industry because people are looking for trusted advisors and thoughtfulness. In this case, however, it is very hard for us to be proactive. We are talking about two technologies, and I think both are great, but we are not necessarily giving opinions on which one we strongly endorse. Both formats are now available in PCs, though — Toshiba is selling an HD DVD-Blu-ray combo drive. We want to wait for them to hit economies of scale.

Vitelli: What is scary is that millions of high-definition players are going into the customers' home through gaming. There is a format war going on and the customer does not even realize it.

Workman: It is the Trojan horse that is going into the home and almost becoming an enabling technology rather than a freestanding unit. Customers have this product and do not even realize it. While various manufacturers on both sides will talk about their unit penetration, it is similar to the early days of HD where consumers had HD capability but did not use it. We are simply not doing a good job of bringing this to life for the consumer.

Rick Souder, Crutchfield: I believe this is an opportunity. When we talk about these technologies, they are still leading edge in the minds of consumers. The consumer has enough interest to do his homework, but they still need guidance. Perhaps they're simply looking for a vote of confidence to go one way or the other if they want to do this.

I think the big key to success is developing simple solutions that can become a mass product. Although many people want to do this, they do not want to go through the hassles to make it happen today. It will be interesting to see if there are leaps in simplicity in the near future, but I am not optimistic, due to the many conflicting interests that exist today.

Workman: To some extent, do you believe consumers are on technology overload? In the past, the industry could focus its attention on one thing, but today there are various things available at the same time. The choices are endless and they are being forced on the customer. If we could offer any advice to the industry, it is to think through the consumer's eyes for a change and start thinking about simple applications and clearing through the clutter. I believe iPod did the best job of that.

Herschman: Now is the best time ever to be a CE customer. Think of all the choices in all the new categories available to them.

Workman: The choices are endless, and getting them in front of consumers in order for them to make up their minds is difficult.

Dealers Adapt To New Flat-Panel Dynamic In Post-Black Friday World

TWICE: Black Friday 2006 was another low watermark in CE discounting, when the industry's cornerstone product category was permanently devalued in a matter of hours. Clearly it was a profitless weekend, but were dealers able to regain some margin equilibrium during the balance of the holiday season through better management of markdowns and mix?

Joe McGuirre, Tweeter Home Entertainment Group: I believe you will see that people did not. Best Buy and Circuit City both saw declines in gross margin as a result of discounting. Our announcement [released earlier this month] will be similar. Because the margin degradation was so large on a category that represented so many dollars, there was really no way to fully recover from it. As a result, all major CE retailers suffer.

I do not believe manufacturing or retailing were able to fully realize the profit potential from the expanded growth and unit lift, and I think that is one benefit that will come from this — this year, I believe the industry will make a concerted effort to be more sober and thoughtful. Whether that discipline will hold through next Christmas remains to be seen, but I believe we will see some amount of industry discipline through the spring.

That said, there are factories that started construction last spring that will come online in the coming spring, which will grow supply. Demand is clearly there, but household penetration still has a tremendous distance to go. That macro environment will continue to exist, and how people strategically monetize is going to be sport for the next couple of years.

TWICE: Still, Black Friday has become a cultural phenomenon, the unofficial starting gun for the holiday shopping season. First, can you afford not to stage some manner of Black Friday promotion, and second, how do you then guide the consumer back to more rational retails after they've had a taste of door-buster pricing?

Mike Vitelli, Best Buy: My observation of Black Friday is that it is its own unique phenomenon. I frankly do not believe it trains the consumer about expected price points. There is a cult group that takes advantage of that day, but as a consumer and as a supplier, I never paid any attention to it. As a retailer, it is an incredibly important part of getting ready for the holidays.

Dave Workman, PRO Group: When you look at Black Friday, particularly last year, you see the low watermark that was established on many higher-ticket goods. Granted, the price does come back up from there, but in reality, it does always degrade the price thereafter.

In December, $999 went up to $1,299 or $1,399, but it did not go back up to $1,799. I believe that has been the case for many years and it has been what happened instead of traditional door-busters.

The lower the price point, the more visible Black Friday pricing is — the higher the price point of the ticket, the more visible it is because it sets a watermark for the remainder of the reason.

Jonathan Magasanik, Sears Holdings: There were a number of plants and manufacturers that came online and there was excess capacity and excess manufactured goods in the marketplace. Consequently, the premier brands were in fear of losing market share and they took appropriate actions. Over time, when supply and demand normalize, you will see more stability and rationalization.

This is no different than the PC industry was 10 years ago. In that market, Joe PC Company and Sally PC Company were trying to take advantage of the excess manufacturing capacity, bringing price points down dramatically.

Vitelli: However, in this case, it is the big retailers rather than Joe PC Company. There are five companies that have each invested $10 billion into panels. To Joe's point earlier, supply and demand are going to work. If the demand is not at the pace that the manufacturers are looking for, it will get created.

Dan Schwab, D&H Distributing: Going into Q4, we had already gone through two or three years of limited availability. This allowed prices to remain high, and high-ticket items were not given away.

As you mentioned regarding the new plants coming online, everyone is betting on capacity. As long as capacity is there, there will be downward pressure to manage because they are all about driving the volume. At the same time, we must ensure there are new entrants to the market. Many of these new entrants will use this as an opportunity to establish themselves and get share when it is difficult for more established players to react.

Workman: However, with the new plants coming on, the efficiency exists to create a lower price point on a larger screen. The promotional activity has taken the bottom down, but as the bigger screen sizes compress down through those efficiencies, everything has to benchmark itself correspondingly below that.

Therefore, do we rationalize the 15 percent reduction this year on stabilized supplies? If that is taken into consideration, on top of what has occurred, the forecast looks as though two years of forward growth in the category has been taken out, which is scary.

Noah Herschman, We must not lose sight of the fact that the customer won last season, and I think that is a good thing. Not too long ago, these panels were $20,000 for a 50-inch, and consumers only dreamed about having a flat-panel TV. Today, many people who were heretofore unable to afford a TV are able to have plasma.

Schwab: We talked briefly about the negatives and pricing in this industry, but as a macro market, we are going to outpace the GDP for a number of years to come. With the growth of HDTVs and related products, the technology continues to grow at a very rapid pace and consumers will be able to keep up. But they will also need a third party to help with the education and installation.

If nothing else, there is an upgrade cycle which is a benefit for everyone. Obviously, there is jockeying, with certain vendors in the news, and retailers gaining or shifting share, but overall, it is a positive environment to be in.

Ross Rubin, The NDP Group: In addition, as cellular networks get faster with new technologies like WiMAX, those open up great opportunities at retail. As you start moving into PCs, mobile video players and other products that can attach to this network, it begins to move beyond the carrier's core competency to present those devices and the nuances between them.

CE Specialty Dealers Are Safe From Wal-Mart — For Now

TWICE: How big a factor was Wal-Mart in disrupting the CE market this past holiday season? Do you think their recent marketing and merchandising misfires left them wounded and even more dangerous?

Joe McGuire, Tweeter Home Entertainment Group: To characterize Wal-Mart as wounded, as some have, is amusing. Their monthly cash flow greatly exceeds everybody at this table. I believe there is journalistic license at play that is really divorced from reality. To say that Wal-Mart is in trouble as a company because they had their first negative comp is ridiculous.

Clearly, they are looking at CE as a growth area and they have picked certain areas as they have moved along. Our business is no different than many others — the retailer with the best supply chain typically owns the entry-level space of a category. For years, the best supply chain retailer in our industry was Best Buy. Although Best Buy is a world-class CE retailer, I do not believe they will beat Wal-Mart's supply chain.

Wal-Mart is going to go take share in entry-level consumer electronics. You have seen many players enter the market such as Costco and Target. As a result, there has been a great deal of channel expansion as they use CE to drive and add on their ticket, as opposed to developing a core competence. That channel expansion, inside of what is happening within the television business, is occurring and will continue to occur. Retailers are shifting their positions around the value proposition map in order to make sure that they maintain their businesses and keep them healthy.

To say that Wal-Mart by itself has disrupted the industry is more sensationalistic than fact. They came out with a $1,299 price on a Panasonic plasma television. In fact, everybody at this table was planning to sell that television at $1,299 before Wal-Mart made their announcement. It made for great press, but I do not believe it is factual to the matter. They have been making inroads into the CE business, and I believe they will continue to make inroads. Wal-Mart does simple better than anybody, and I doubt that will change.

Dave Workman, PRO Group: Wal-Mart's message is their price. However, I think you have to look at this category differently than some of the other categories they have penetrated with price. In this category, you have a more efficient mechanism of getting the product to the consumer: the Internet.

I believe what you are saying about Wal-Mart is that they will always try to transform a business into their model, to serve their interests and create commoditization. But despite Bentonville's efforts, Circuit City and Best Buy are still beating them in this particular category. CE has some battle-hardened, tough retailers, although I know you can also say that about grocery and a lot of other categories.

TWICE: Like the toy business.

Workman: However, I think that this is a unique category. Wal-Mart will always grow, but this business has some good retailers and good business models. Additionally, it is a technology business. Growth has always come from technology, not from commodity.

Mike Vitelli, Best Buy: Wal-Mart has already done a large amount of business in CE. There are 20 million TV sets sold every year and they are selling a large percentage of them, but they are the ones helping the industry to have a $200 average selling price for CRT.

The bigger question is can they sell a $1,299 TV to their customer base? When a 32-inch LCD is $499, they will sell them — they have always sold them.

TWICE: Except now you have Panasonic and Hitachi and some other premium brands on their floor.

Vitelli: Quite frankly, it goes back to the earlier conversation of needing to put many panels somewhere. Right now, if somebody takes them, that is a good. However, my intuition is that some of those manufacturers may be disappointed with what actually transpires there.

TWICE: Non-traditional channels are also siphoning off some flat-panel business, such as home improvement, home fashions, apparel, supermarkets and pharmacy chains. Have you felt any impact?

Jonathan Magasanik, Sears Holdings: I think they will find the return rates to be disastrous, and it will be a short-term experiment.

Workman: There has always been opportunistic play where Walgreen's will have three combination TVs on the end cap, particularly around the holidays. With flat panels, I believe the price of admission may be somewhat high when they begin to see post-holiday returns.

Ross Rubin, The NPD Group: There may be more opportunity for them in low end, particularly because their customer base is less likely to have premium cable and satellite services.

Vitelli: I agree.

Dan Schwab, D&H Distributing: We've talked about one of the key differentiators: the service and installation. Once there is overcapacity, you have to find places to push product. When there is more normalcy in the market, the manufacturers are very quick to decide who is in the business and who is not.

Dealers Welcome Advent Of Universal Cable Boxes

TWICE: Do you see much opportunity in cable set-top boxes?

Ross Rubin, The NDP Group: There will be more of a push towards the middle of the year when new FCC regulations [banning integrated digital set-top cable TV boxes] go into effect.

Joe McGuire, Tweeter Home Entertainment Group: What we do now is partner with the local providers. In the Comcast market, our installers pick up a box and take it as a part of the installation. We see that as eliminating a step in the process for the customer, as a partnership in terms of getting the product installed as opposed to the sale of the box.

Rubin: This would open up the market for new kinds of DVRs and media center PCs for the higher-end customer. This customer is not satisfied with the DVR functionality on their cable set-top box and wants a smoother, more fluid, more functional interface.

Mike Vitelli, Best Buy: There is also an opportunity to address the customer who is renting boxes in five different rooms. In the past, if you didn't subscribe to premium channels, you wouldn't need a box in every room. However, with high definition, you will need multiple boxes, particularly with DirecTV and similar services.

TWICE: How does that impact your relationship with the multiple service operators?

Vitelli: I think a relationship can still exist because the consumer still uses the cable company's service and CableCARDs, and it can get the boxes set up correctly during the installation.

Jonathan Magasanik, Sears Holdings: Most cable companies do not like the hardware business. They try to outsource all installations and only use their own crews for repair work. They like the reoccurring revenue stream that comes from the monthly payments, and they want to spend their energy getting customers to add more channels and upgrade their service.

Cable installations are rarely a positive experience so if they can place the blame on someone else, they look much better to the consumer at the end of the day.


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