Rough Times Ahead for the Electronics Industry

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Sacrifices to Come

Growth in sales of smartphones, the mobile devices that provide for e-mail and high-speed Web surfing, could abate as well. Apple has already made big cuts to the price of its iPhone in the past year, and some analysts see BlackBerry maker Research In Motion (RIMM) following suit. If demand falls far enough, carriers such as AT&T (T) and Verizon Wireless may also have to sacrifice some margin through bigger subsidies and less expensive service packages. "It's the hardware but also the rate plans that have consumers concerned, because [most] data plans require a two-year commitment," says Hugues De La Vergne, a Gartner (IT) analyst. "People are concerned they may not have a job next summer."

In the next few months, prices on electronics could dip 6% to 8%, compared with 4% to 6% in a typical holiday season, Deloitte's Steidtmann estimates. SanDisk has announced new MP3 players that will cost $20. More manufacturers may take their wares to discount retailers and superstores; some analysts have speculated that even Apple will begin selling some devices through Wal-Mart (WMT) starting in November. "We have not made any announcements at this time," Apple spokeswoman Jennifer Bowcock says.

Some within the industry are clinging to optimistic projections. In August, consulting firm TNS Retail Forward said consumer electronics stores' fourth-quarter sales will grow 4%, up from 3.5% a year earlier. TNS is holding to that forecast, even after the financial picture worsened in recent weeks. Ever since the 1960s, consumers have allocated a larger percentage of their holiday spending on durable goods to gadgets, TNS says. "Shoppers continue to show a preference for consumer electronics over other categories," says Frank Badillo, senior retail economist at TNS. And this year, millions of Americans will have to buy an electronics device to meet the February 2009 government deadline for the analog-to-digital TV migration. To continue watching TV, many consumers are expected to purchase new sets.

The CEA, which represents electronics manufacturers, is about to release a relatively rosy holiday forecast, projecting that unit sales of gaming hardware will rise 3.5% this season, and demand for audio and video devices, such as TVs, speakers, and MP3 players, will grow 4.7%. The hope is that consumers will keep on spending through year's end and defer the biggest spending cutbacks to 2009—and that people like the Houghtons will be the exception, not the rule.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.