Industry

Part V back in January was supposed to be the final installment of my post-CES chronicles, but we’ll add a Part VI to look at how all these products are getting to market. Each of these posts includes a quick look back on 2005 trends and a quick discussion of products introduced at CES 2006. This one is less about CES and more an essay about the rising power of distributors in home theater…

In 2005:

Go back ten or twenty years, and there were two main distribution channels to bring home audio and television products to market: big box retailers, and specialty audio retailers (some of whom were branching into home theater with the advent of large screen televisions, laserdisc players, and surround sound). Today there are two more ways to reach consumers: the Internet, and custom installers, also called the CEDIA channel.

To service custom installers, major distributors are gaining power. Common in the computing industry, a distributor is simply a middleman – a large wholesaler with a warehouse who takes on inventory and then resells it to retailers (or, in this case, to custom installers). Nobody likes a middleman because they add costs, but when you have a lot of small retailers placing small orders, manufacturers often cannot deal with them; enter the distributor. In the world of computing – particularly small business-oriented products, VARs (Value Added Resellers) provide a lot of the IT services used by law firms, florists, etc. When they need a network firewall or piece of software, it is far more efficient for everybody for the VAR to call a major distributor like Ingram Micro, which specializes in putting together small orders, rather than try to open an account with Microsoft or Cisco.

At CES…

CES isn’t the primary show for custom installation, that would be the big CEDIA trade show in Indianapolis in September. But it was interesting to see how the CES Show Daily (a thick daily trade show paper produced just for CES) was chock full of distributor ads touting A/V equipment. Distributors are riding the custom installation wave, a market that is becoming seriously crowded.

• For starters, a lot of the independant A/V stores are having a really tough time and are essentially becoming custom installers themselves. Consumers have been putting more money towards big screen TVs, which are low margin in the best of times. To compete with the big box stores, smaller retailers often sell TVs at a loss, and hope to make up the margins on speakers, which are far more profitable. But audio sales are down – the Wall St. Journal reported earlier this month that audio sales dropped 12% last year as consumers bought more plasmas and iPods and fewer speakers and receivers. This is not true across the board; I interviewed an employee at a local high end A/V mini-chain who told me he’s having a banner year. His secret: he refuses to sell plasmas without an accompanying set of slim speakers from Definitive Technologies or KEF. But when audio can’t pay the bills for cut-rate video pricing, then the other option for independant retailers is to make money on services, specifically custom home installation.

• Electricians are moving from one low voltage specialty – custom lighting installation – to other (ostensibly similar) low voltage jobs: computer networking, whole house automation, and home theater. True, some knowledge of acoustics would certainly be useful (read: ought to be required) before an electrician is qualified to set up a home theater. But there is a definite convergence between home automation, networking, and A/V underway already, and nearly every custom A/V job requires an electrician at some point, so this trend is likely to accelerate.

• Finally, traditional custom home theater installation benefits from the decor-friendly plasma push. Many consumers are not capable of installing a plasma on their own: it’s made of glass and must be uncrated properly, it’s heavy and brackets must be mounted on studs, and it requires A/V sources to be in the right spot if a wall mount is going to look professional. Most consumers are not capable of installing in-wall speakers, which require cutting into drywall and pulling wire through walls.

The main reason why distribution makes sense for CEDIA members (and their retail and trades-based company) is structural. Custom installers typically need small orders from several different manufacturers drop shipped directly to the work site on an irregular basis. This is something a distributor is designed to handle, and nearly impossible to replicate by setting up one-on-one relationships with manufacturers. Distributors are now advertising that not only do they own inventory, but they hold it at mulitple warehouses around the country to provide just in time delivery on products so that installation schedules don’t slip. Distributors higher up in the food chain ("Value Added Distributors," or VADs) also take over some of the mix-and-match/training functions that can help an installer hone in on just the right doodad for the job.

-avi

The high end of the market is evolving: mainstream brands offering the same thing – only better – are having a tough time.  A couple of months ago Sony pulled the plug on its Qualia brand, despite excellent reviews of its SXRD projector and RPTV sets.  It seems Qualia was one luxury Sir Howard Stringer couldn’t afford in his reorg.  No reasons were given for the move, but I’d speculate that having a high R&D halo brand only helps when the main consumer electronics business it fuels makes money.  Since Sony is losing money across the line, it makes more sense to build the high end technology into mainstream products themselves, hopefully enabling a bit higher margins and injecting some profitability down the line.

That isn’t to say that the high end is dead – far from it.  The key is to provide a unique and differentiated experience.  Two examples:

• When I met with Kaleidescape earlier this year, they emphasized not just the features and functions added to their $25,000 -$50,000 video archiving and distribution systems, but also the growing number of customers they have.  Kaleidescape is an example of a high end product that is not just a slightly better DVD player, but with the new bookmarking features, an entirely new way to watch movies. Movies start up in the right aspect ratio without any setup, resume exactly where they’re left off, and can be set to jump just to specific scenes – similar to listening just to specific music tracks across a genre instead of listening to an album at a time.

• The D-Box lineup is another high end product creating a new market – something like an amusement park ride, physically moving your couch around in synchrony with the movie.  This is a step well beyond bass shakers that vibrate your couch when something goes "boom."  The D-Box X3ME (supposed to be pronounced "extreme") line recently added vertical motion to its entry level line.  Entry level is a matter of perspective: the MSRP is $10,000. An add-on field installable system is $4,299 plus either $3,000 for the controller or your own PC plus an $800 kit. The idea is to extend this beyond "the sky is the limit" crowd, but it is still a very high end product by anyone’s definition.

-avi

Engadget unceremoniously posted a version of its witty, sardonic take on all things gadgety (including some home theater content) circa 1985, as if Engadget started out as a BBS (Bulletin Board System – a pre-pre-pre-cursor to web sites).  Was today April 1, and I missed the memo?  This is brilliant, brilliant stuff. 

Of course, there wasn’t much of a home theater industry back in 1985 – which in and of itself is interesting, showing just how fast this market has grown.  The best you could do then was HiFi VHS and a 35" TV — RPTVs were just too dim to work well for most, and front projection was even more unusual.  (No flames, please – yes, I know Runco and several others were around, but this was still before the dawn of Dolby Pro-Logic surround sound).  The big home theater news was getting the new VHS VCR to stop flashing "12:00," now that VHS vs. Beta was effectively over, and the quick rise – and even faster consolidation – of the mom and pop video rental business.

Without any real home theater industry to catch my interest, my focus was on the hot technology of the day – the PC industry.  These were the days of the Coleco Adam (with daisy wheel printing and proprietary tape drives), the Macintosh launch with MacWrite and MacPaint in shades of gray, and Compuserve. When Bill Gates really was as young as he looked. The incredible move from 12" floppies to 8" floppies to 5.25" floppies to 3.5" floppies. Making your fingers forget WordStar keyboard shortcuts to learn WordPerfect keyboard shortcuts. Borland. TRS-80. Atari vs. Intellivision vs. Colecovision.

The comments section on Engadget’s 1985 entry shows a clear generational divide: those who remember the era fondly, and those born too late, who are puzzled by the quaint specs and outrageous prices of the day. In its own way — new companies, rapid obsolescence, completely new technologies — the PC industry in the 80’s was just as exciting and fluid as home theater or even the mobile phone/music/imaging/game/GPS/PDA market is today. The key difference is that those of us who remember the tech of that era were, well, geeks. You had to actively seek out information about the latest chipset or software company, mostly in industry-specific press or at trade shows (tough, but not impossible, to do when you were in high school).

The biggest difference today is not the technology, but the culture, which often takes longer to change. Today, there are Personal Technology columns in every mainstream newspaper. My mother has an LCD TV, Wal~Mart sells several Home Theater In a Box systems, my wife has a cameraphone, and I can’t go to the synagogue without getting pestered with questions about which smartphone to buy or where to position surround sound speakers.  Displays and mobile devices are evolving faster than most folks can keep up with them – the product lifecycle of a cell phone is brutal. But if you’re in the market today for a 42" plasma TV or a converged phone/iPod/camera, you aren’t necessarily a geek – just a regular consumer.

-avi