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In the consumer electronics business, winning or losing a hotly contested format war often turns on how much red ink a company spills before shareholders—or the threat of bankruptcy—force one side to call it quits. Samsung and LG Electronics are engaged in the latest tech industry version of Mortal Kombat, this time in the 3D flat-panel TV market. Each is counting on high-margin sales of 3D sets to help reverse uninspiring profits in their broader television businesses. The company with the winning 3D format will have an edge in creating a standard that the rest of the industry may need to follow to stay in the game, at least until the next big technology shift.
Even then, it's still far from certain that Samsung, LG, or anybody else can produce a 3D product compelling enough to persuade consumers to pay a premium. Set makers were disappointed last year when they tried to bring Avatar-like theater experiences with 3D into the living room. Some 248 million televisions were sold worldwide; only 3 million were 3D sets. Consumers were turned off by high prices—a 55-inch widescreen 3D set runs from $1,500 to $3,500—and warnings from manufacturers about nausea, cramps, dizziness, or eyestrain from hours of wearing expensive battery-powered glasses, according to surveys. UBS (UBS) Investment Research analyst Shinsuke Iwasa predicts LCD TV sales, the largest market, will grow 10 percent in 2011, the slowest pace since flat-panel technology became popular a decade ago.
All this means that Samsung and LG, as well as Sony (SNE) and others, increasingly will have to win market share with a time-honored tactic in consumer electronics: stealing it from the other guy. The trick is to do that without slashing prices. Set makers rely on new technologies such as 3D to create marketing buzz and gain pricing power in what's basically a commodity business with ridiculously low profit margins. "You can get better margins on personal consumer electronics such as irons and electric shavers today than on TVs," says IHS iSuppli (IHS) analyst Riddhi Patel. Not helping matters is a generation of consumers who have learned that it pays to be patient when it comes to the latest gadget because prices usually drop.
Not every company has the stamina for this kind of game. On Apr. 18, Royal Philips Electronics (PHG) ceded control of its 80-year-old television unit to an Asian contract manufacturer, Hong Kong-based TPV Technology. Philips Chief Executive Officer Frans van Houten said he concluded that a simple "tweak" to the TV business would not have stemmed years of losses. In 2008, Philips exited the market for high-end plasma televisions. While profits are hard to come by, other companies such as Samsung, LG, and Sony are reluctant to end their production of TV sets because they put the brand front and center in a consumer's home, creating a loss leader for sales of higher-margin devices such as tablet computers, smartphones, and Blu-ray Disc Players. Samsung and LG make a modest profit on their overall television business.
LG kicked off the latest format rumble in January, when it unveiled a product line called Cinema 3D TV. These sets use an in-house "film patterned retarder" technology that the South Korean company claims creates 3D imagery without the blur and flicker of existing, first-generation stereoscopic sets sold starting in 2010. The older sets require expensive active-shutter, battery-powered glasses whose lenses have slats that open and shut to create the 3D effect. The new LG sets use a special film on their screens that works in tandem with light, conventional polarized glasses used in movie theaters. Vizio and Chinese TV manufacturers went along with the new technology, and LG executives in March said they were trying to lure Sony, a longtime buyer of Samsung panels, into their camp.
Samsung is sticking with its stereoscopic sets and battery-powered glasses and has counterattacked, contending LG is using 35-year-old technology that delivers only half the potential resolution of full high-definition movies. The company released a print ad campaign in South Korea in which an actor in a business suit and a monkey are both wearing 3D glasses. The monkey asks: "Why is my 3D TV not fully high-definition?" A top Samsung executive in a press conference in Seoul called LG engineers "stupid" for what he called misleading comparisons of the two technologies. He later apologized.
David Das, vice-president of marketing for displays at Samsung's U.S. electronics unit, says LG's passive-display Cinema 3D sets cost almost as much money as comparably sized Samsung models, with inferior picture quality. Samsung is addressing customer complaints by creating glasses that are more comfortable to wear, including two free pairs with the purchase of any model and extras for just $50. With the price tag coming down from about $200 a pair, consumers will get to experience 3D without compromising on picture quality, Das says. "Unlike other 3D technologies, there's no comparison" in quality, he says. An LG spokesman didn't return phone calls seeking comment.
All this is a sideshow to the bigger challenge: "The big question is not about technology, what works and what doesn't, it's about consumer acceptance," says Randy Waynick, Vizio's chief sales officer. To get there, Samsung, LG, and other 3D set manufacturers are bundling other consumer-friendly features such as the ability to download content from the Internet. Research firm DisplaySearch optimistically forecasts that nearly 18 million 3D sets will be shipped in 2011, rising to more than 91 million in 2014. James Cameron, director of Avatar, says consumers will eventually warm to 3D. He recently formed a company to drive adoption of 3D technology in television, sports, and advertising. "What they need is more programming, and sales will increase," he says. Television makers can only hope he's right.
The bottom line: LG and Samsung hope their 3D TVs will catch on, though last year only 3 million sets out of 248 million sold had 3D capability.