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Deep, early price cuts on tech gadgets by electronics makers and retailers may be good for consumers and bad for profits
Michelle Evans wanted to buy a Kindle electronic book reader for her boyfriend, but was having trouble fitting the item into her budget. Then Amazon (AMZN) cut the price by $40. So on Nov. 21, the 30-year-old researcher snapped up a $259 Kindle e-book reader and a leather case. "Amazon has dropped the price, and it's a lot more affordable," says Evans, a Chicago resident. Price cuts by retailers and manufacturers are luring lots of shoppers to electronic gadgets this holiday season, but what's good news for consumers will come as a mixed blessing for the tech industry. Volume is likely to rise, but total revenue and average selling prices are expected to decline. Heading into Black Friday and Cyber Monday, two of the busiest shopping days of the year, retailers around the country are cutting prices on phones, music players, TVs, and other electronic staples. One of the most aggressive cutters is Amazon. "If you look at who is really killing it in terms of pricing, it's Amazon," says Stacey Widlitz, managing director at Pali Capital. She recently analyzed prices on some 50 electronics items, including global positioning systems and TVs, and found that prices at Amazon were 13.6% lower than at Best Buy (BBY) and 8% lower than at Wal-Mart (WMT). Amazon and Wal-Mart have lowered prices since early November while Best Buy was raising prices by 2.1%, Widlitz estimates. Amazon will sell more electronics than Sears (SHLD) and Kmart combined, according to a survey of more than 1,000 shoppers conducted by market researcher Rockhopper Research in partnership with Peanut Labs. Consumer Electronics' Holiday Glitter
Some electronics retailers began slashing prices in mid-November, rather than waiting till the early-morning rush of the day after Thanksgiving, typically considered the first day of the yearend holiday shopping season. "Many customers expressed that they were not able to shop early in the morning and were unable to get those deals," says Luis Castillo, general manager of a Best Buy in Alexandria, Va., who introduced discounts on flat-panel TVs and GPS devices on Nov. 20. Lower prices and well-marketed, newly introduced gadgets are attracting more consumers who in the past might have been drawn to such areas as toys and clothes. This year, a record 80% of consumers surveyed wanted an electronics item for Christmas, up from 79% last year and 75% in 2007, according to the Consumer Electronics Assn. Consultant NPD Group says apparel and toys are still the most popular holiday gifts. Still, electronics items may overtake other categories and become the No. 1 most popular Christmas gift by 2010, says Marshal Cohen, NPD's chief industry analyst. "We may see a new king of the hill," he says.
Besides Amazon, Sony (SNE) also sells e-book readers. The Nook, from Barnes & Noble (BKS), is due to hit store shelves in December. This year, e-book readers entered the list of top 10 most desired consumer electronics gifts for the first time ever, according to an October survey of 1,000 U.S. households conducted by the CEA. On Nov. 24, Amazon announced it has extended the Kindle's battery life by 85% and made it easier for the device to read PDF files. Unit Sales Up, Dollar Revenues Down?
This year marks the first time Apple's (AAPL) iPhone hit the top 10, too. The five most popular consumer electronics products include notebook computers, MP3 players, flat-panel TVs, video game consoles, and digital cameras. The iPhone trails e-book readers at No. 7. "Consumers think about that particular product as a category," says Shawn DuBravac, chief economist at the CEA. Other smartphones should be popular as well, with carriers and retailers rolling out extensive Black Friday deals. Wal-Mart is offering the new Palm (PALM) Pixi smartphone, with a touchscreen and a full Qwerty keyboard, for $25 with a two-year contract from Sprint Nextel (S). Lower prices will boost unit volume but cut overall sales for many retailers and gadget manufacturers. Fourth-quarter unit sales are expected to rise 6%, according to the CEA. At the same time, dollar revenues from consumer electronics are expected to slump 7.5%, to $44 billion, says DuBravac. Even as the economy gathers strength, consumers are still opting for lower-priced goods such as cheaper netbooks instead of traditional laptops and 32-inch flat-panel TVs rather than bigger screen sizes. Wal-Mart currently offers a 32-inch flat-panel TV for under $300, a price unheard-of months ago. Many consumers won't buy if they aren't offered a deal. Andrea Ihara, a 50-year-old business development manager in Portland, Ore., says she may buy a laptop and a TV this Black Friday, but only if retailers shave at least $100 off the standard price. In 2007 and 2008 the average selling price of consumer electronics items was unchanged at $324. By the fourth quarter this year, it is expected to drop to $285, according to the CEA. "Consumers are very deal-driven," DuBravac says.