How is the High End CE Industry Responding to the Economic Climate? 
Home Theater Feature Articles Other
Written by Andre Marc   
Wednesday, 02 December 2009

The story that that has dominated domestic and international headlines after last year’s presidential election is the state of the world economy, specifically the recession that has affected virtually every sector of the world’s markets.  Between unemployment numbers, devaluation of securities, the tightening of credit lines, the weakening of the U.S. dollar, and reluctance of consumers to spend during such uncertain circumstances have put a halt to capital expenditures. In short, it is the classic vicious circle.

Mainstream retailers have been especially hit hard. Long standing businesses such as CompUSA, Circuit City, KB Toys, and Linen N’ Things comprise a very short list of companies that had to close up shop and liquidate.  Along with retail, the travel and hospitality, automotive, and general services sectors have been dealt knockout punches.

The consumer electronics industry is down, but has fared better than was expected to due to a number of factors. New HDTV’s, next generation Blu Ray players, gaming devices, smart phones, cameras, electronic book readers, and next generation Apple iPods / iPhones helped move product, along with elaborate marketing campaigns aimed at free spending, younger buyers.  But nonetheless, the numbers don’t lie.

U.S. CE Growth Chart
According to the CEA (Consumer Electronics Association), overall CE sales are down 7.7% up until July 2009, as compared to 2008. Hopes are obviously high that the numbers will pick up and there are some reasons to be a bit optimistic.  Microsoft’s new Windows 7 could generate sales of new PC’s.  Many manufacturers are adding the hot new “touch” technology capability to versions of their current products. Some of those include Logitech, Blackberry, HP, and of course Apple, whose iPod Touch has taken the market by storm.

But how has the generally dreary landscape affected a much smaller segment of the consumer electronics industry, namely high end audio? First and foremost, it is clear from talking to dealers, manufacturers, importers, and audiophiles that the business has shrunk considerably.  There have been a few casualties, and more than a few consolidations. Many owners of established high end brands have been forced to sell their companies to either conglomerates or private buyers in order to stay in business.

Are Audiophiles on a Break?

An inescapable fact about the audiophile business is that when one gets beyond the basics, spending slows. Amplification, source, and speaker quality, many of the elements that make up a high end home system, fall into the category of discretionary spending.  Items such as after market AC cords, isolation devices and racks, room tuning devices, esoteric signal cables, external power supplies, and other accessories are what the typical audiophile spends large sums of money on, but are not as essential by comparison. As any economists will tell you, the most unessential purchases are the first to be cut in any household.

For years, audiophiles have kept the high end electronics business thriving by riding the never ending merry go round of upgrading components.  In this scenario, the typical audiophile would settle for a particular CD player, turntable, speaker or amplifier in a manufacturer product line until they could afford to move up a model or two. Audiophiles are also known for getting bored with their home audio set ups, buying new components, getting bored again, and buying more. In the current economic climate, even the well heeled obsessive customer has held back on impulsive and unnecessary purchases.

Another contributing factor to the shift is that high end companies are introducing newer, lesser expensive models that perform exceptionally well for their price point, encouraging many audiophiles to reexamine their budgets, and to question wild spending. These products have come about due to trickle down technology, off shore manufacturing, and wicked competition. There are a number of high end designers who are also offering “all in one” audiophile grade units. Naim, Arcam. Carat, and NAD are but a few companies that have products that offer a CD player, DAC, integrated amplifier, and tuner all in one chassis! The prospective buyer only needs to add a pair of speakers.  By all accounts, these units can be competitive with a more complicated set up in the right circumstances.

The last 2 years or so has been particularly harsh to the smaller manufacturers, who generally moved a small lineup of handmade units. This year, Los Angeles based Hovland Company shut their doors after ten years. They made very highly regarded tube and hybrid preamplifiers, amplifiers, and cables. There was just not enough revenue coming in to maintain a factory and a staff. NHT, a speaker manufacturer, closed their doors in what they claim is an effort to reorganize the business.

The owners of Krell, a well known maker of solid state components and speakers, went through furloughs, layoffs, and finally sold 40% of the company to a NYC equity fund to stay afloat. Soon after, the founders (Dan and Rondi D'Agostino) were unceremoniously let go, locked out of their Connecticut offices and are subsequently suing FP Captial Partners (the equity firm in question) to regain ownership of Krell.


It should be noted that financial troubles for audiophile manufacturers is nothing new, even in the best of times. Often these companies are run by people with much bravado, a tremendous amount of technical knowledge, but very little marketing or business experience. Sometimes even those with good business plans hit a plateau as fads come and go.  Many iconic companies of the past have purchased by conglomerates, including McIntosh, Audio Research, Quad, Marantz, and a host of others.

Bryston LogoThose who have fared better than most are companies that tend to be more diversified.  There are a few manufacturers who make high end products for both the pro audio and home based user market. I spoke to James Tanner, VP of one such company, Bryston, based in Ontario, Canada. Bryston has been making award winning gear for over 40 years. When asked if Bryston, in the current recession, had altered its approach to product development, Mr Tanner offered the following:

“Bryston has never designed a product with a price point in mind. We manufacture products with a no cost object approach because our goal is ultimate performance without the compromises that cost restrictions impose. Due to the fact that we are involved in many more audio markets beyond the relatively small audiophile market (Broadcast, Pro, Studio, Industrial, etc.) we fortunately have a much better cost effectiveness in our products as opposed to companies that cater strictly to the audiophile market. We are able to purchase reasonably large amounts of parts at a time, which gives us a very good cost advantage when negotiating with our suppliers; especially during economic down times.”

When asked about current feedback from the dealer network, Tanner replied, “Their business is definitely down and they, like us, are fighting for every sale available. Being able to adapt to changing consumer buying trends (Internet) and needs of their potential customers is causing some to go through a lot of restructuring.  The walk-in traffic is not happening at the levels that it used to.  Therefore developing new ways to attract and service the evolving client base is an indisputable priority.”

Certainly, another huge factor in the shrinking audiophile market is undeniable and crushing competition from other sources of entertainment. Internet, gaming, HDTV, portable music devices, and smart phones have altered the way consumers spend their idle time.  Sitting down and listening to music on a state of the art system seems a quaint notion to many.

When asked his thoughts on what the road ahead looks like, and how Bryston can adapt to this new environment, Tanner replied “I would say that we as an industry can no longer rely on high-end audio being a priority for the iPod generation as it was for my generation. We have to figure out how to bring the typical young music listener forward and help develop their interest in ‘listening’ seriously to music as opposed to what I see now which is ‘collecting’ music. When I was growing up, the hierarchy was buying your car, then your HI-FI system. Today it’s computers and Bryston is looking at how we can develop products that can motivate the iPod crowd to use their music storing devices to integrate with a very high quality playback system.  Our new BDA-1 External DAC (Link) is an example of one attempt to address this market segment”

Thiel LogoTo get a perspective of a manufacturer with a focused product line, I had the opportunity to get some observations Ken Dawkins, VP of North America for THIEL, a very highly respected, long time maker of loudspeakers. When asked about the perception of “value” in high performance audio being more important then ever in the current economic climate, Dawkins responded, “I would say to an extent that is probably true in some categories. At THIEL, we have not altered our plans to continue to introduce new product, both loudspeakers and whole house audio systems that are based on ultimate performance parameters and, in some cases, proprietary technology. THIEL has often been viewed as a company that offers "value" in high performance audio and that may be more important now than ever before. We will work diligently to continue the legacy left by our late co-founder, Jim Thiel.”

In response to a question regarding the need to cutback on R&D, expansion, and product development, Dawkins stated, “While THIEL has always been a conservatively run company, we have had to tuck in our shirt and tighten our belts both on the personnel side and perhaps on the marketing side. However, as an engineering driven company, technology and product development continue to be our focus. As with organizations in most industries, THIEL has diligently tried to find new and more efficient ways to bring product to market and to market that product. For example, we have expanded out channels of distribution, added rep firms, forged relationships with other companies both inside and outside of audio and participated profoundly in the social networking arena.”

In regards to dealer feedback, Dawkins responded, “There is continued concern, especially among the traditional independent dealers. Part of the problem is that there appears to be no real ability to forecast the short-term or long-term future right now. Further, there are profound issues within given markets.... the insurance industry in Hartford, the auto industry in Detroit, real estate and tourism in Florida. In addition to the larger economic malaise, each area of the country faces its own set of issues, some greater than others.”

While Bryston, Thiel, and a handful of others have been faring reasonably well considering the climate, some manufacturers have resorted to clever marketing strategies or pricing changes to reignite sluggish sales. One example comes from Rega, a long established maker of turntables, amplification, speakers, and CD players. They recently had a “cash for clunkers” trade in program for two of their CD players, the Saturn and the Apollo.  They were willing to accept any CD or DVD player, working or not, for up to 25% off of the new unit. Tough times indeed.  Internet retailers like Music Direct and Audio Advisor offer deep discounts on newly discontinued products, and as well as additional buying incentives.

In what might be the biggest blow on the press side of the industry, Stereophile, a U.S. based audiophile print publication, watched its parent company, Source Interlink, file for bankruptcy in a bid to restructure their debt. Other magazines have lost circulation, let staff go, or have shut down completely, as is the case with a few well known European publications. Advertising revenue has been shrinking steadily, as well as attendance at high end audio trade shows.

Looking Ahead

Is it all gloom and doom? No, not really.  The high end audio industry has looked towards the future with many designers betting on the future of computer based music systems.A number of new DAC technologies have appeared, and companies like Soolos, Olive,NuForce, Sonos, and many others have brought to market audiophile grade music servers that work perfectly well with traditional high end components. At the budget end of the spectrum, Cambridge Audio’s DacMagic and and Musical Fidelity V-DAC, both under $500, have garnered universal praise for their price performance ratio.

All these products seem to be converging with the much anticipated death of physical media, with all signs pointing to high resolution downloads as the way consumers, or a at least audiophiles, will purchase music. Even the personal computer industry is positioning itself for a cash-in, with audiophile grade tweaks such as high end sound cards, high quality network connections, aftermarket power cords, silent fans, and touch screen monitors.

The irony of the situation is that, if left up to many audiophiles, the hobby would continue to shrink to prevent any watering down of the quality of product offerings, keep out the non believers, and shake out any half-hearted hobbyists.  While this may have a romantic glow to it, without revenue and customers, high end companies cannot continue to make ends meet, introduce new products, or stay in business to service legacy products. One may argue that high end audio is a luxury market and, as with all downturns, it is cyclical. However, many would agree it may never have been this bad. 

Hopefully what goes down must go back up. The consensus among industry experts is that as long as audiophiles remain passionate about excellent sound, technologies advance to become more affordable, and younger people are exposed to the hobby, it will continue to attract new interest. I for one agree.

 

* Special Thanks to James Tanner of Bryston and Ken Dawkins of THIEL for their insight!






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