FOR ELECTRONICS RETAILERS it will be the holiday season of the flat- screen TV. But the companies that make the key component — the flat screen itself — won’t have much to celebrate.
Heading into the Christmas sales period, traditionally the biggest time of the year for electronics goods, prices of flat-screen TV sets are falling. Sharp Corp.’s 32-inch LCD-TV with built-in HDTV tuner, which was introduced to the U.S. in January at a suggested price of $5,000, now carries a suggested price of $4,000 and is being advertised by some online retailers for about $3,100, including shipping. Wal-Mart Stores Inc. recently began selling a 42-inch plasma set for under $2,000.
As prices slide, sales of flat-screen TV sets are expected to double this year and account for about 5% of global TV unit sales. Even so, these sets still yield far more profit for retailers than ordinary, tube-based TV sets. That markup is keeping prices above the level that could turn flat TVs into a mass-market item, say the companies most responsible for the price drop: the Asian makers of the highly complex glass screens called panels.
That isn’t fair, these companies say. To build the liquid-crystal display, or LCD, panels, they are investing tens of billions of dollars in factories as advanced as those that make computer chips. But these manufacturers can’t directly control retail prices since they are just one part of the flat-TV food chain. They sell their panels to TV-set makers, who in turn sell the finished sets to distributors, who then ship the TVs to retailers. Each piece of this chain takes a cut.
The world’s biggest LCD-panel manufacturers have been cranking out the flat screens faster than the TV industry can absorb as new screen factories have come online. That has prompted the panel makers to cut their wholesale prices by as much as 30% in recent weeks, a move that has lowered their profits. Now they are calling on TV makers, distributors and retailers to do their part to move the screens by reducing their markup on LCD-TVs — which amounts to as much as 40% of their retail price, according to analysts.
“Right now, to work on an immediate and quick liftoff of the LCD-TV market, the [retail] channel margin has to come down,” says Ron Wirahadiraksa, chief financial officer of LG.Philips LCD Co.. The Korean company is the second-largest maker of LCD panels and is a joint venture of LG Electronics Inc. of South Korea and Philips Electronics NV of the Netherlands.
Retailers insist their margins aren’t unduly high. They say the costs of displaying and marketing such big-ticket TVs don’t leave high net profits for them. Store chains have invested heavily in training sales clerks to explain the mind-numbing differences in flat-screen technologies. They also have a lot of money tied up in inventories of the costly TVs despite the relatively low sales volumes they generate.
Average selling prices of big-screen TVs have dropped to about $3,000 from $5,000 two years ago. That’s great for consumers. But for retailers, even if they keep charging the same markup in percentage terms, they end up with a lower gross profit per set sold in dollar terms, notes Michael T. Ryan, a former vice president of merchandising at Circuit City Stores Inc. and now president of international retail consultants Ryan Partnership.
The LCD panel makers, meanwhile, face competitive pressure from other screen technologies, including plasma, which generally is used in screens larger than 40 inches, and from the new high-resolution projection TVs that are powered by digital-mirror chips. Since September, plasma-TV prices have plummeted and contributed to a market-share gain over LCD sets. Large LCD screens cost more to build than plasma screens, though that may change in coming years because of efficiencies in the newer LCD factories.
Makers of plasma screens do face some of the same profit pressures as retailers apply a similar markup to those sets as well. But plasma- screen factories aren’t as costly to erect as LCD-screen plants, and there’s a bit less competition among plasma-screen makers, so the profit squeeze isn’t as bad.
Throughout the electronics industry, executives are plotting the rates of price declines and sales increases for flat-screen TVs and consulting their history books. Over the past decade, the pace at which consumers adopted each new electronic gadget — from PDAs to DVD players to MP3 music players to camera cellphones — seems to have accelerated. But most analysts predict that flat-screen TVs won’t take off as quickly as flat-screen computer monitors, which went from single-digit market share in 2000 to represent more than half of all monitor sales this year. Monitor purchasing has been driven by businesses while TVs are chiefly purchased by consumers, who tend to be more sensitive to price.
Still, flat-screen TV prices are reaching a level that draws far more buyers than the so-called early adopters of new electronics gear. “
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