OEM suppliers will have a huge market through 2000.......................
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Outlook '98 <Picture>
Digital home theater fuels upswing in consumer markets
HOME THEATER drove the consumer electronics market in 1997, thanks in part to new digital products such as DVD players and digital receivers. Most retailers are banking on a continued upswing this year.
The numbers support the climate of cautious optimism. First-year sales of DVD players worldwide are said to have reached 1 million units. The Consumer Electronics Manufacturers Association (CEMA) reports that some 200,000 DVD players were sold to US dealers in the first six months of 1997 - a figure that betters initial sales of VCRs and CD players.
"Consumers can buy a wide range of DVD players at affordable prices, and now that the number of movie and music titles has begun to proliferate, we expect to sell as many as 400,000 players this year [1997] and another 1 million during 1998," said CEMA president Gary Shapiro.
The push to digital has had a knock-on effect on analog home entertainment products as well. Retailers think the benefits will continue for the next few years.
Through the first eight months of 1997, factory sales of video hardware totaled 26.7 million pieces, a 1-million-unit improvement over the volume shipped during the same period in 1996. Sales of VCRs are on their way to surpassing last year's record of more than 14 million. Sales of audio equipment to US dealers were similar to 1996's total, at $3.94 billion.
"Digital technology has given people more options and stimulated sales throughout the industry," said Scott Swire of ABT Electronics in Morton Grove, Illinois. ABT has been offering home appliances and consumer electronics since 1936.
Industry invests in new technologies
Analog products are still strong and unlikely to go away. But the cutting-edge in the industry, where good sourcing margins are likely to be, is digital.
European electronics companies project that a full range of digital products will be available to replace current audio and video equipment by the year 2000. These products will offer substantial improvements over existing standards of sound and image reproduction, as well as new functions and more entertainment choices.
In theory, existing TVs, VCRs and hi-fis could be thrown out in favor of new products that exploit more fully the opportunities offered by digital. With digital TV carried into the home through satellite, cable and terrestrial broadcasts - all, in Europe using the same DVB standard - and decoded in a set-top-box, users will have an unprecedented choice of hundreds of channels.
Many of these channels will be in widescreen format, and some - using standards that are likely to have been finalized this year - may offer still higher levels of viewing quality with HDTV. Digital TV channels could support 5.1 surround sound.
DVB services will offer high-speed data as well as TV channels in their multiplexed signals. As a result, TV users will have fast access to the Internet and other data applications.
DVD should by 2000 offer recording capabilities too.
As consumers take on digital broadcasting and DVD, they will also be looking for TVs that can fully exploit the capabilities of the new technologies. "We can expect an evolution in display technology. Televisions will become larger and move toward wide-screen," said Alfons Dassen, managing director for new business at Philips Sound & Vision.
TV sound functions, whether through internal speakers or through integration with audio systems, will also need to support 5.1 surround sound.
In radio, digital broadcasts using the European DAB standard should become widely available over the next two years, providing a range of added data services alongside CD-quality audio signals.
"You could use the data to display extra information connected to the radio program, [such as] the name or photo of the artist whose record is playing," said James Brodrick, DAB project leader at the Visual Information Laboratory, Mitsubishi Electric Europe bv's center for digital technology research.
With audio equipment, the best established digital A/V technology, the CD, is likely to remain for a time the dominant technology for pre-recorded material. And, with CD-Recordable products set for launch during 1998, it may also have replaced analog tape for recording by the millenium.
DVD growth pains
While much of the technology is here or in advanced stages of development, it will be a while before mass market adoption happens. That acceptance is seen to be only by 1999 and into 2000.
Content is an issue, whether TV channels or DVD titles.
As an example, European DVD sales have lagged those in the US, largely because European users have, until recently, had fewer recorded discs available.
Disagreement over some areas of DVD standards have also been harmful. "At this stage there's a little bit of confusion in consumers' minds about the standards," said Thomson Multimedia SA vice president for digital product development, Jasjit Saini.
Prices must also fall further from current levels of over $500 for end-users. Manufacturers expect second-generation DVD players to incorporate more integrated chipsets, which will cut costs significantly.
Chipset development may also simplify some outstanding standards issues. The question of whether Musicam or Dolby Digital will be the dominant sound system for Europe will become less material once players are able to support both, a development expected to become widespread this year.
Question of recordability
However, the most important development in DVD will be recordability, which Saini expects to have in 1999.
"I don't think it will really get into millions and millions of sales until it's got recording," said Saini. "When that happens, it will become a replacement for the VCR. I would expect it to take off immediately then."
If recording does become available then, Saini thinks industry estimates of around 7 to 9 million unit sales worldwide in 2000 are too conservative. FIrst-year DVD sales, after all, rocketed to 1 million units.
Retailers echo this sentiment.
"Once it gets down to the price where the consumer doesn't stop to think about the VCR, and it is recordable, then DVD will mean the end of the VHS," said Ron Taylor, president of Massachusetts retailer Wholesale Products.
"For DVD to take over on a worldwide basis, it will have to have a worldwide standard," Taylor adds.
Digital broadcasting
For DVB, the main factor determining growth will be the rate at which new digital broadcast services are established. So far European digital broadcasting has been concentrated in France, Italy and Spain. Here the first satellite services are up and running.
"In Europe we've been saying for the last two years that the market was about to take off, but so far it's not taken off in any great numbers, except perhaps in France," said Thomson's Saini. "But I do now think that digital will start in a big way in 1998."
The German and UK markets for digital are expected to open up this year, with the launch of new satellite services in both countries and the first digital terrestrial service in the UK.
A European DVB user base of around 4 to 7 million is a realistic prospect for 2000, estimates Saini. Currently there are around 1.5 million users.
DVB's prospects could also be improved if more complete standards could be agreed, allowing set-top box makers to achieve longer production runs with single designs that can be used by all manufacturers, according to Philips' Dassen.
Cable operators are holding back development of digital services because of the standards question. "A lot of them want to wait for further developments of standards," Dassen said.
DAB receivers
In Europe, sales of DAB receiving equipment are expected to grow gradually over the next two to three years. A number of broadcasters of digital radio in Europe, using the DAB standard, have now moved from pilot transmissions into permanent operations, according to Mitsubishi's Brodrick.
"It will be in the high end of car radios in 1998, while in 1999 we will start to see some of the middle market going digital."
Pricing will come down to about $800 this year, although the product will remain much more expensive than analog radio. Brodrick believes a price level of under $320 may be achievable by 1999 or 2000.
One difficulty with early models is the chipset requires high power levels, which restricts product use to mains or car use. But consumption will fall, which will make it possible to develop portable models, Brodrick said.
That said, some manufacturers do not expect digital radio to take as fast as digital TV or DVD.
"The cost of a digital radio on its own would be quite expensive, because it needs the same types of decoder as in set-top boxes and DVD players. If you could combine it with a DVD player, or maybe with DVB, it might be more popular," Saini said.
A place for analog
Still, few expect analog products to vanish from stores in the near future. Or, in some markets, at all.
DVD is likely to be unaffordable for many poorer countries, and even in richer economies digital audio and video will fail in some market segments.
CDs, for example, are best played with maximum audio quality on CD players. They can be played on DVDs, but the sound quality isn't the same.
ABT Electronics' Swire adds that DSS is not catching on. AM radio will be around for sure, he said. And there is no near future death for FM stations.
"Just remember, between 10 and 20 percent of people will never have digital technology. How can it mark the end of current technology?" he asks.
Good Guys' spokeswoman Joanie Parsons said that so much rental business is tied to the VCR/VHS technology that it will be around for a long time.
Good Guys, based in San Francisco, has 74 stores throughout California, Nevada, Washington and Oregon. It is one of the leading specialty retailers of consumer electronics in the United States.
A key concern, in fact, is that the prospects of new technology do not damage sales of existing equipment. "It can happen that people will put off purchasing decisions," said Saini. "That would not be good for the industry. But we can avoid that if we manage it sensibly."
The industry must keep both feet on the ground, urges Philips' Dassen.
"We think that the electronics industry will be transformed by these technologies. Over several years it will create a lot of business. But we don't want to dream too much. We still have to live for several years with our traditional products."
OEM supply opportunities
New products, new OEM opportunities? Early versions of digital products tend to be produced by multinationals, who have the advantage of large-scale R&D resources. Given the complexity of the early products, manufacturing has normally been carried out close to their R&D centers rather than in lower cost regions.
This could change, however.
"The components makers will start to provide the technology as black boxes that can be put together quite simply," suggested Brodrick. "That will open up the way for small companies to come in."
This has already happened with digital set-top boxes where a number of smaller manufacturers have entered the market, he added.
Major manufacturers will, over time, begin manufacturing of digital products in China, if only to serve the local market, Dassen predicted.
"I don't really think that if you want to succeed in the Chinese market you can just stay out."
However, digital technology will have some fundamental effects on the way the industry operates, and particularly on the relationship between product development centers and manufacturing, according to Dassen. Once the a full range of digital products are established, much of the further development will be done through changing software rather than through physical design changes.
It will be less important to have development work done close to where production is carried out. Manufacturing can be anywhere in the world.
This development will make lower cost economies such as China attractive as locations for assembly. But, since more of the value added will be in software, Chinese companies will want to diversify into this area - much as India has, Dassen predicted.
"I would expect that there will be a lot of education directed at software development in China over the next few years. That will lead to a move to software development rather than basic assembly." |
