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Prices on tech gadgets remain low, but the pace of declines is slowing and may reverse course if component costs bottom and demand revives
If there were ever a time to hunt for bargains in tech, it's now. Prices for many must-have gadgets are low as lackluster demand forces manufacturers and retailers to slash prices. "Most categories continue to see [above seasonal] price declines," says Stephen Baker, vice-president of industry analysis at researcher NPD Group. The Consumer Electronics Assn. expects consumer electronics sales to slump 0.6%, to $171 billion this year. According to PriceGrabber.com, average selling prices on laptop computers, flat-panel TVs, navigation devices, and the like are on the decline.
But there are signs that the pace of price declines may slow in the coming months. Serial price slasher Circuit City has closed its doors, reducing pricing pressure on other retailers. Demand is expected to rebound in the second half, and component prices are starting to rise.
Prices of components such as flash memory, used in cell phones, and some types of digital storage used in items like computers are starting to recover, says Bill McClean, president of researcher IC Insights . Suppliers of many types of components have already increased prices by 2% to 23% since December, in some cases for the first time in two years, he says. Component prices may rise even more in the second half as electronics manufacturers gear up for the holiday season, McClean says. With component prices rallying, gadget manufacturers like Hewlett-Packard (HPQ), Sony (SNE), Nokia (NOK), and others may be forced to choose between raising prices on finished items or holding prices steady at the risk of cutting their margins.
Less Pressure on Best Buy
Circuit City, which historically has accounted for about 10% of total U.S. electronics sales, closed its stores in March. After filing for bankruptcy protection last fall, the electronics retail chain slashed prices through the holiday selling season. Its disappearance reduces pressure on other retailers such as Best Buy (BBY).
Other retailers have additional reasons to avoid selling wares at any cost. An inventory pile-up that left unsold items on shelves through Christmas is working itself out. "A lot of inventory has been taken out of the system," says Shawn DuBravac, economist with the Consumer Electronics Assn.
Consumer demand is expected to bottom out this year. On Mar. 13, the U.S. Census Bureau announced that sales of appliances, TVs, and cameras jumped almost 10% in January from December, though they're still down 3.2% from a year earlier. "TV sales have been surprisingly strong," says Gary Balter, a retail analyst with Credit Suisse First Boston.
Staying Home and Watching TV
Some consumers are opting to buy new televisions instead of going out for entertainment. "Many of our customers are taking advantage of lower prices by trading up in larger sizes of TVs, and more functionality and features," Paul Ryder, vice-president of consumer electronics for Amazon.com (AMZN) writes in an e-mail. In 2007, Amazon's top-selling screen sizes were 46 in. and 40 in.," he explains. Last year, as average sale prices went down, Amazon's top seller remained 46 in., but the second best-seller increased to 52 in. "So customers were making up that cost savings in size," Ryder says.
Discounting is doing its part to jump-start demand. Wireless carriers, for instance, are increasing their subsidies on smartphones. While the prices at which handset manufacturers sell handsets to carriers are still declining at a slow 4% annual rate, smartphone prices for end users are plummeting, to about $150 recently, from $300 two years ago, says Michael Morgan, an analyst at consulting firm ABI Research. Carriers have been eating up the difference and both manufacturers and consumers have benefited. Recently, Amazon.com began selling the T-Mobile G1 smartphone for less than $100 with a new service plan. When introduced last fall, the phone cost $179.
Introduction of new devices later in the year could help prop up average selling prices as well. This year, the Consumer Electronics Assn. expects prices of MP3 players to climb to $128, from $126 in 2008, in large part due to price moves by Apple (AAPL). On Mar. 11, the electronics maker introduced its new iPod shuffle for $79. The earlier iteration of the shuffle sold for less than $50. Analysts expect Apple to release a larger iPod Touch this year as well. As more gadgets are introduced in the second half of 2009 in time for the holidays, price declines may reverse course.