The Road from Ruin

We've all heard the joke about the hapless business owner who observes, "I'm losing money on every sale, but I'll make it up in volume." That's been the guiding philosophy of TV manufacturers for the past couple of years.

In flat-panel HDTVs, the industry has a product that everyone wants to buy. But because of cutthroat competition, no one is making money.

The irony is that this discounting doesn't have to happen, at least not to extent that it does. The industry would move almost as many sets if it held a firmer line on pricing, and enjoy a lot higher dollar volume and profit in the process.

"Consumers are willing to pay for the product," observes Ravi Nookala, Senior Vice President Consumer Sales and Marketing at Sony of Canada Ltd. "But no TV manufacturer has been able to make money. Look at anybody's balance sheet. Nobody is making money."

In our year-end wrap-up for 2011, TV manufacturers said they're determined to reverse this trend. "It shocks me to see how much ASPs have dropped," stated James Politeski, Senior Vice President Sales and Marketing at Samsung Electronics Canada Inc., echoing the sentiments of other suppliers. "The way to stop it is to bring out great, well-designed products, and communicate their benefits. The consumer wants great products, and is willing to pay for them. We need to deliver the experiences."

As we've reported, at CES all the major TV vendors introduced premium products that should command premium dollars. These include OLED TVs, 4K2K displays, super-slim LED-illuminated LCDs, and TVs with compelling Web-enabled features.

Great products alone won't be enough to halt the slide in ASPs. This will require a change in distribution strategy as well.

Competition among manufacturers isn't the only driver of price erosion. Retail competition is a factor as well. Powerful retailers have pushed suppliers for insane price points to drive volume and smother competitors. Resolutions to end practices like sell-through allowances have been as short-lived as a junkie's resolution to stay off smack.

If manufacturers want to restore profitability in the TV business, they have to distribute selectively. That's why we're not surprised by the news that Sony has terminated its relationship with 2001 Audio-Video, Centre Hi-Fi and Visions Electronics, which we reported earlier today.

Our lack of surprise has nothing to do with those retailers' merits, which are considerable. Nor has it anything to do with the different interpretations that greeted Sony's decision. Frank Annecchini, President of 2001, says Sony wants to sell large volumes to big-box stores rather than incurring the costs associated with sales-assisted floors. "Sony doesn't sell to Leon's or Bay Bloor Radio either," Annecchini commented, "so we're in pretty good company. We wish them luck." Nookala said regionals and independents are "our backbone," but noted Sony is reevaluating its distribution and focusing on "accounts who support our brand."

Along with innovative products, selective distribution is a necessary condition (but definitely not sufficient) for reversing the irrational pricing trends of the past few years. We expect to see more of these kinds of decisions, not just by manufacturers, but by retailers as well. It's hard for anyone to make a profit on products that are distributed everywhere. If companies want to start making money in the TV business again, they have to pick the right partners.