Why flat-panel TV retailers need Apple to turn the tide in the HDTV war

Blackfriars noted in November that new competition in selling flat-panel displays would hurt retailers this Christmas. Yesterday, the Wall Street Journal reported that widespread discounting of flat-screen TVs has wounded retailers this holiday season. And even the largest retailers aren't immune from this trend:

Electronics specialist Circuit City became a casualty of the battle yesterday, reporting a third-quarter loss triggered by rapid price declines on big-screen TVs. The Richmond, Va., retailer said it was caught flat-footed as it was forced to respond to discounts and other sales incentives offered by its rivals. Circuit City shares tumbled $4.04, or nearly 18%, yesterday [Wednesday] to $19.01 in 4 p.m. composite trading on the New York Stock Exchange.

Other retailers have been dogged by missteps: Wal-Mart, of Bentonville, Ark., is fighting anemic sales gains overall and market-share losses in consumer-electronics despite higher sales of flat-panel TVs. Wal-Mart gets 10% of its $312 billion in annual sales from consumer electronics, computer and game software and DVDs.

"Last year, it was a tug-of-war between Best Buy and Circuit City," says Stacey Widlitz, a retailing analyst at Pali Research. "There are so many more players this year it has been a whole different story." She predicts that the competition eventually will douse smaller retailers that don't have Best Buy or Wal-Mart's clout.

Best Buy, based in Richfield, Minn., is proving to be a fierce competitor. In contrast to the losses posted by smaller rival Circuit City, Best Buy's third-quarter profits rose 9%, though holiday promotions left its results below Wall Street expectations.

The irony of these falling profits is that flat-panel TVs have actually been one of two saviors of the consumer electronics industry in the last five years (the other is the iPod and MP3 players) ravaged by rapid price declines in personal computers and digital cameras. Flat panels were such a unique and stylish product that they actually convinced consumers to pay up to three times more than a similar-sized CRT or projection TV. In fact, I would argue that high-definition television would probably have failed to win consumer adoption without the seductive attraction of flat-panel TVs.

Flat-panels are now hitting a crucial inflection point. Large 42-inch flat panels are now falling below the magic price point of $1,000. High-definition programming such as sports and on-demand movies is now prevalent enough to compel a larger population to invest in flat panels. But the problem for retailers is that at sub-$1,000 price points, single-digit profit margins just don't pay for the floor space and retailer attention required by flat panel retailers.

Now of course, retailers figured that add-ons can help mitigate the profit pinch of flat panel TVs. That's why you can't buy a Panasonic or Sony plasma at Best Buy without getting pitched five year extended warranties, Monster cables (retailers love it when they can sell a $10 cable for $95), and home installation. But as prices decline, those add-ons also must decline in price and margins too, leaving retailers back where they started.

And to be fair, flat panel HDTVs are no picnic for consumers to get working themselves. In recent surveys, a quarter of HDTV owners never actually watch HDTV content because they didn't get the right gear from their TV service provider. And with average consumers facing a tangle of composite, S-Video, component, DVI, and HDMI cables to hook up to their TVs, its no surprise that many consumers believe are still watching standard NTSC TV signals on their shiny flat panels instead of HDTV (the good stuff).

This is a retail conundrum. But is also an opportunity.

Just 10 years ago, PCs were in a similar place. PCs had just fallen below $1,000 (causing immense consternation to the dedicated computer retailers), Windows 95 was out, and the World Wide Web and email were intriguing consumers to try out the Internet. But just as with HDTV, the standard three piece PC required a rat's nest of cables to connect, and then the consumer was left to configure dial-up numbers and accounts, set up PPP and DNS tables, and figure out how to log into their POP email accounts. Most consumers threw up their hands.

And then Apple introduced the iMac. It has a simple marketing benefit: it promised to get you on the Internet in 15 minutes of opening the box. Apple even made a TV commercial showing a seven-year-old setting up an iMac racing an experienced PC consumer to get on the Internet. The seven-year-old won by twenty minutes. This one product single-handedly reshaped consumer perception of the Internet, and reshaped their image of Apple to one of elegance and simplicity. And of course, Apple sold millions of iMacs in the process, and in the process, became the highest-margin (by percentage of revenue) computer maker, a title it retains today.

Retailers need a similar product and vision for HDTV flat panels. They need a company who can sell the benefit of an elegant, all-in-one flat-panel HDTV and guarantee a unique product experience. They need a company that will not only market the product, but also a lifestyle brand. They need a company who can deliver HDTV content to play on the product and will manage the brand experience end-to-end. And they need someone who recognizes that they can command and share higher profits with retailers.

Apple, are you listening?

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