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How is the High End CE Industry Responding to the Economic Climate? Print E-mail
Wednesday, 02 December 2009
Article Index
How is the High End CE Industry Responding to the Economic Climate?
Bryston and THIEL Interviews
What the Future Holds

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.


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