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Consumer Electronics: Free-Falling Prices And Rocketing Sales


This holiday season, Wal-Mart Stores Inc. (WMT) stunned the consumer-electronics world with a store-busting $29.87 promotion on DVD players the day after Thanksgiving. That's a third the price of the industry average, and a mere 3% of the price when DVD players first hit the market six years ago. The coming year promises more of the same, as prices fall faster than ever on older generations of products. Indeed, the race to the lowest price is intensifying as mega-retailers, such as Wal-Mart and Virgin Group, and computer giants, including Gateway (GTW), Dell (DELL), and Hewlett-Packard (HPQ), pile into the highly fragmented consumer-electronics (CE) market -- often by partnering with Chinese suppliers.

Despite the cutthroat price competition, a mix of new -- more expensive -- offerings should revive the CE industry's growth prospects. These will include handheld video players and household network-storage devices that act as a central hub for photos, music, and video. Along with the proliferation of Wi-Fi wireless connections and flat-panel screens, that will make the networked digital home a reality for more consumers. The upshot? After stalling for the past three years, CE industry revenues in the U.S. are forecast to increase 4.2% in 2004, to $99.4 billion, according to the Consumer Electronics Assn. (CEA). "The strong holiday sales are giving a good start to the year," says Tom Edwards, an analyst at NPD Group Inc., which tracks retail sales. "And what's hot is anything that's digital."

DVD Multitaskers

If 2003 was the year of the low-end DVD player, 2004 will see the rise of multi-purpose DVD devices. The standout will be DVD recorders that burn tv shows, movies, and even photographs onto recordable disks. Chinese-made recorders from such brands as Cyberhome and Classic have breached the $300 price point already, and worldwide DVD recorder shipments and sales this year are expected to more than double, to around 10 million units, worth $3.2 billion. Companies such as Philips Electronics (PHG), Panasonic, and Pioneer are pushing more advanced recorders with built-in hard drives that allow pause and instant replay features and make editing -- rearranging scenes in home movies or clipping commercials from TV shows -- a breeze. Sony (SNE) has a new PlayStation game machine sporting a dvd recorder. Even with the strong growth in DVD recorders, shipments of stand-alone DVD players are expected to increase 12%, to 48.5 million, worth a total of $3.8 billion.

Digital audio players are also poised for a strong year. Around 18.6 million mp3 players are expected to be sold worldwide, up 48% from 2003, estimates In-Stat/MDR. Companies have laid out strategies on how to play the market as competition heats up. Big brands such as Dell Inc. and Samsung Group are starting to undercut Apple Computer Inc.'s (AAPL) dominant iPod music player, which currently sells for between $300 and $500. In 2004, the average price of mp3 players with hard drives could drop to around $200. To avoid the coming shakeout in audio players, companies such as RCA and Archos are moving upstream by offering $400 portable video players.

Networking, both wireless and wired, is also helping rev up consumer demand for more digital gizmos in the home. More consumer gadgets -- from DVD players to game boxes -- will come with built-in networking, letting consumers transfer and play media on different devices. By the end of 2004, 29% of U.S. homes with Net connections may have home networks, up from just 11% now, according to the CEA.

In 2003, the PC giants began competing to outfit the digital home, and the turf battle with traditional CE makers will only intensify this year. That's because each new wave of CE products -- even with their short product life cycles -- offer higher margins than PCs, plus they help drive computer sales. For instance, DVD recording devices or flat-panel displays that link to PCs have margins up to 25%, vs. 10% for commoditized computers, estimates IDC. This year, global sales of digital flat-screen TVs are expected to double, to 9.7 million units, or $16.7 billion. "The really compelling story is how all these products work together," says Peter Appl, CEO of HPshopping.com.

It's a smart strategy for PC makers and will be a boon for consumers. But the increased pricing pressures created by these new players is tough on CE giants. To fight back, traditional CE players are relying on marketing to create a distinction in the minds of consumers between electronics makers and computer manufacturers. "We're getting the word out that consumers should put their faith in the companies whose business it is to make these displays," says Bob Scaglione, vice-president for marketing at Sharp Corp.'s consumer electronics group. Consumers are willing to believe, but only at the right price.

By Heather Green in New York


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