Best Buy Co. (BBY:US) is betting Americans are ready to buy $3,000 televisions.
The world’s largest electronics chain has teamed up with Samsung Electronics Co. and Sony Corp. (6758) to open in-store showrooms staffed with Blue Shirts trained to tout the merits of Ultra High-Definition, or 4K, technology, which generates a picture four times sharper than existing high-definition TVs.
The question for Best Buy Chief Executive Officer Hubert Joly is whether the pricey innovation will jumpstart a wave of home-theater upgrades the way flat-panel TVs did last decade -- or wind up a flop like 3D sets.
“If you look at the history of TV, what sells TVs is the promise of a better picture. 4K hits on that,” said Stephen Baker, an analyst for NPD Group Inc. No technology since high definition “really fulfills that.”
Joly could use a few hit products to get shoppers in the door. After winning plaudits from Wall Street for cutting costs and boosting profit, his turnaround ran aground when holiday sales disappointed. Revenue continued declining in the most recent quarter, falling 3.3 percent for a ninth-straight drop. The shares have slid 22 percent this year as investors wait for him to revive sales and prove that Best Buy can survive in an era when many shoppers buy their gadgets online.
Since becoming CEO about two years ago, Joly has pressed consumer electronics makers to find products with a wow factor. His Richfield, Minnesota-based company has even cited data from NPD in its past two earnings press releases showing sales across the industry fell more than its own.
Televisions in particular have been dragging. While Americans continue to buy TVs to watch communal events like the Super Bowl in their living rooms, secondary sets for bedrooms and kitchens are losing out to tablets and computers, said Veronica Thayer, an analyst for IHS Technology based in Austin, Texas. U.S. TV shipments fell 13 percent to 34.3 million last year from 39.3 million in 2011, according to IHS. Best Buy’s U.S. revenue in the category has declined the past four years.
TV makers have been trying to come up with a successor to flat-panel, high-definition sets only to watch 3D televisions flop and Web-connected sets fail to catch on. They say 4k will take off because the sales pitch is so simple: a TV with four times the resolution -- 8 million pixels versus 2 million.
Joly is also betting that Americans are ready to trade in their old sets. TVs are upgraded about every seven years on average, so theoretically the millions of people who snapped up flat-panel sets last decade are prime candidates to buy again. He’s also counting on the fact that more than 90 percent of TVs sold in the U.S. are still purchased in a store, according to researcher DisplaySearch.
“4K provides new and enhanced benefits to the customer,” Joly said in an interview in May. “We will be the destination for consumers to see the difference.”
With Samsung (005930) and Sony sharing the costs, Best Buy has revamped the home-theater sections in 650 of its 1,050 U.S. stores, with dedicated space for each brand and 4K as the centerpiece. At a Best Buy store in Manhattan, the screen on a 65-inch 4K TV shows a lush green valley in crisp, high-definition.
Then the picture splits, and the image on one half is converted from high-definition to near 4K, revealing more texture to the grass and wisps of steam in the clouds floating above the mountains. Best Buy’s pitch is that 4K TVs make existing content look better, an attempt to ease concerns that there aren’t many movies or TV shows available yet in the format, a hurdle that derailed 3D.
There are plenty of 4K skeptics out there. One is Geoffrey Morrison, a freelance tech reviewer who last year wrote a widely circulated story on CNET headlined âWhy 4K TVs Are Stupid.â Morrison’s premise in a nutshell: the high-definition details on a 4K set are largely wasted on the human eye the farther a person sits away from it.
“Most people are buying TVs less than 50 inches and they are sitting 10 feet away, and at that distance you really can’t tell the difference,” Morrison said in an interview.
Michael Pachter, a Wedbush Securities analyst in Los Angeles, said Americans are unlikely to upgrade to a 4K TV.
“It’s just like 3D,” he said. “It’s a gimmick.”
In a video on its website, Best Buy says viewers can get an “immersive” experience by sitting five feet from a 4K TV.
“Because the pixels are so tiny and you can sit so close to the screen, it feels like you’re really there,” it says.
What’s more, video-game players often sit closer to TVs and can now do that with a bigger screen, said Luke Motschenbacher, Best Buy’s merchant director.
For many consumers, the main hurdle is price. While 4K prices fell 30 percent in the second quarter, the TVs still cost about $2,500 on average, compared with $720 for all other sets, Thayer said. The technology debuted in 2012, and 90,000 sets were sold in the U.S. last year, IHS says. As typically happens, competition will drive down prices. Vizio Inc. plans to release a 50-inch 4K for $1,000 this year.
Doug Sherrard, a 33-year-old executive recruiter in New York is aware that the new screens have their downsides but couldn’t help but notice how clear the 4K picture was.
“That actually does look pretty damn good,” Sherrard said. “I would consider it.”
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