PRO Group’s Workman Blasts ‘Land-Grab Mentality’ of Q4 Flat-Panel Pricing

What happened Q4 was as if “someone sent the sheriff away on vacation, passed pistols out to everyone in town and said, ‘Have a blast,'” said Workman, former Ultimate Electronics CEO. “That’s exactly what we did -- whether it was manufacturer or retailer or everyone in between. It was like a Gunfight at the O.K. Corral to see who could be the last man standing. Retailers left to their own devices never have been the most disciplined lot, and manufacturers to some extent have always been the sheriff of the land, right or wrong.”

Workman blasted “this land grab mentality” among retailers and suppliers that acted as if “this was the last year we were ever going to sell flat-panel, so let’s grab as much ground as we can in a short period of time.” Industry data show that as a result of the free-for-all, “we have robbed ourselves of 2 years of sales growth,” Workman said. “What shouldn’t have happened until 2010 is now happening this year, when the industry has pretty much flattened out.” Though it’s not necessarily “the end of the world,” the possible “repercussions” are many, Workman said.

All industry players should have seen their fortunes rise in 2007, but instead it will be a year of winners and losers, Workman said. Best positioned at retail are the “harvesters -- those that are efficient at supplying a demand that has been created,” he said. But CE makers must be mindful that harvesters aren’t enough, he said: “You also have to have people plant seeds in the ground. You have to have people growing the business.”

It’s hypocritical for manufacturers to be “wringing their hands” at the prospect of having only 2 retail customers to sell, “then turn around to do everything to favor those 2 customers,” Workman said. To CE makers, he urged that “we all need to exhibit a little discipline quickly - [not] taking our products and the technology and everything that we do that’s so wonderful and shortchanging it to the extent that we do. Look at it from more than a quarter’s period of time. Look at it over the evolution of a product cycle. Try to work the dollars, not just the units, and work more closely with your partners on the experience that that consumer has with your product. Because at the end of the day, that’s really what it’s about. We're all here collectively to deliver something, which -- absent an experience -- is just a spec sheet.”

There’s a “hallmark of shame” in the way the CE industry has merchandised HDTV, Workman said. “So many people haven’t experienced high-definition,” he said: “They still think digital cable is the answer, but they don’t understand why the picture doesn’t look as good. They think 2 speakers at the bottom of the set is 5-channel surround.” The industry need not resort to a “speed & feed” mentality, because doing so “won’t make a dime for anyone in this room,” Workman said. “This is a business that I believe should still have its best days in front of it.”

Asked by a moderator what went right and wrong in Q4, Steve Colky, vp-mdsg. at Ken Crane’s Home Entertainment, said what went right was that holiday unit sales “increased dramatically.” But in Dec. and Jan., Crane’s had its lowest TV average selling prices in “many years,” Colky said. At Crane’s there’s a “mantra,” Colky said: “Video without audio is nothing but surveillance.” It suggests the need to sell HDTV as “a presentation, not just a display,” he said. The average customer who walks into a Crane’s store is looking for a complete “entertainment environment,” he said. But through commoditization, vendors “are making the product less and less important,” he said.

Asked the same question, Noah Hershmann, AV dir. at Amazon, said he couldn’t really think of much that went wrong because “the customer was the one who won.” For consumers who fantasized about owning a flat-panel TV but thought they couldn’t afford one, “retailers made their dreams come true,” Hershmann said. Sales growth in Amazon’s hardlines business -- most of which comes from CE -- outpaced its total revenue growth for the holiday, he said. That’s because Amazon overcame consumer “trepidations” about buying big-screen TV online, he said. No longer are consumers fearful about Internet credit-card security, he said. Unbiased customer reviews on the Amazon site have become a “staple” of the online shopping experience, he said. They also create a sense of “community” that can’t be duplicated in at brick & mortar, he said. The last “big white elephant” -- that you can’t examine a big-screen TV when buying online -- also has dissipated as an objection, he said.

Flat-Panel Display Conference Notebook…

Flat-panel displays had another year of double-digit growth last year, but it was the 3rd straight year of declining increases, DisplaySearch CEO Ross Young said. Revenue rose 14% to $85.5 billion, he said. TVs are driving display market growth, Young said. Their share of display revenue jumped to 39% from 32% in 2005 and 27% in 2004, though that share includes CRTs, he said. Despite “tremendous” flat-panel market growth, panel suppliers are seeing price decreases because of competitive pressures, he said. But those decreases paled in comparison with LCD TV and plasma TV price drops at retail, he said. The “birth and rise” of Vizio as the first successful warehouse club brand was a central reason that average selling prices dropped as much as 75% last year at retail, he said. Growing retail competition and “severe” brand competition were other big reasons, he said. “There are too many brands out there because it’s so easy to get supply,” Young said. Lowlights of the year were the Sony-Samsung price war in May and Panasonic’s dropping of MAP pricing for Black Fri., he said. Aggravating the situation were slower than expected TV sales in Europe from World Cup promotions, causing the U.S. distribution channels to get “stuffed” with product, he said. The industry could really “benefit” from a display shortage, he said. “Less supply will make it harder for new entrants to get panels and alternative sales channels to get product,” Young said: “This will lead to higher prices, higher margins and a shakeout of brands and retailers.” As a step to recovery, Young advised vendors to “limit your most advanced technology to your closely affiliated brands and other high end brands as long as possible.” This would allow “both the brands and the panel supplier to enjoy a premium for an extended period,” he said: “If advanced technology such as 1080p diffuses too rapidly to low end brands, this increases margin pressure throughout the supply chain. Retailers need to cooperate here as well, limiting SKUs which force prices and margin dollars down.” Other trends: (1) Despite Panasonic’s adding capacity at its Amagasaki #3 plasma plant, LCD capacity of 7G fabs and larger will be more than double plasma capacity in 2007, Young said. (2) All 40-42W 1080p LCD TVs will be under $1,000 by 2010, putting 1080p plasma at a “premium,” he said. (3) Flat-panel revenue growth will flatten by 2010, making it important that panel suppliers and set makers maximize their opportunities now, he said. In the U.S., flat-panel revenue may start dropping by 2009, he said. (4) Supply and demand will become “increasingly seasonal,” he said. Surpluses under 10% are possible in 2nd half 2007 and 2008, though overcapacity in plasma will continue putting price pressure on large LCD TVs, he said. ----

Panasonic faces “the risk of overdomination” of plasma TV, said Yasuo Nakane, Deutsche Securities vp-displays & consumer electronics. It’s foolhardy for Panasonic to concentrate only on increasing its plasma market share further, Nakane said. To fend off the challenge from LCD TV, Panasonic “must take action” with the entire plasma industry in mind, he said. The shift to 1080p in the spring will be “critical” to plasma’s long-term prospects, Nakane said. ----

Going into 2006, flat-panel TVs had been viewed as the “saving grace” for CE retail, said Matt Fassler, Goldman Sachs managing dir. But “the reality” has been “inconsistent” stock performance for Best Buy, Circuit City and other publicly traded retail chains. “The notion of flat-panel TVs as a cure-all is over, and the market is aware of that,” Fassler said. That’s partly because strong double- digit growth in flat-panels couldn’t overcome declines in analog TVs, he said. Best Buy and Circuit City need to “further differentiate from the mass market,” he said. Circuit City’s challenge is to “achieve critical mass” for its Firedog service brand, which began as a “standing start,” he said. Best Buy is in much better position with its Geek Squad, but needs to further “harmonize” its CE and PC service offerings, he said. ----

Average LCD TV pricing was $3,638 in Q4 2006 and could fall to $2,475 by Q4 2008, said David Barnes, DisplaySearch vp-strategic analysis. Higher TV panel capacity bodes well for CE set makers in the next few quarters, Barnes said. But with capacity growth slowing, offbrand suppliers could face scarcity in supply beginning 2008, he said. There could be a “dramatic slowdown” looming in panel pricing per sq. meter, Barnes said. Price reductions averaged 17.1% yearly in recent years, but that could slow to 7.6% yearly by 2010, Barnes said.