Friday, December 7, 2007

Slumping U.S. Economy Puts Sting on AV Industry


A friend of mine, Craig Pease, who used to own a high-end speaker company called Evett and Shaw, spoke (with his stand-up comedian style of delivery) about his Orange County, California neighbors and their spending habits during the recent housing boom.

“You live on Newport Coast, in a fancy tract house that you bought a year or two ago for $1,300,000, and your neighbor sells a similar house down the street for $1,600,000 – what do you do? Of course you take out an equity loan and buy a Bentley Continental GT because you just made $300,000 right?” OK, so Craig was being sarcastic, but way too many people around the country actually think the equity in their home will never shrink, especially here in California where 25 percent yearly increases to property values become yet another entitlement of living in the Golden State.

These are the same kind of people who thought that $525 per share was the right time to buy into Yahoo back in the day.

In recent months real estate values have declined, and now people all over the nation are feeling the sting. It has also had a definite, short-term impact on the home theater business. With large flat panel HDTVs priced well below $2,000, they are no longer just high-end goodies designed exclusively for the “A Paper” or the 800-credit score crowd who didn’t need to borrow money to pop for a $20,000 50-inch plasma a few years back.

At today’s prices the much maligned, “sub-prime” audience can enjoy a big, bright HDTV, even if their financial future isn’t quite as bright as their new television set. With many middle class Americans now feeling the sting of shrinking equity in their homes and growing consumer debt on credit cards, many industry experts suggest that sales for AV gear have to suffer along with the rest of the economy. Optimists point to electronics, video games and anything HD to be among the hottest holiday sales items. Final sales number from the fourth quarter will tell the final story.

One area of the economy dealers quietly say is booming is in the international export business. While dealers aren’t really supposed to sell U.S. designated gear to other nations, it's hard to really stop them from taking an order. Factor in today’s weak dollar and those Euros start to spend a lot better when someone from overseas is waltzing down Fifth Avenue as opposed to the Champs-Elysees. It is somewhat easier for foreigners to buy US speakers and cables than it is to purchase US audiophile electronics with sophisticated chipsets that require specific AC voltages and can render a $10,000 amp useless overseas. Another issue is that the importer of American-made audio and home theater gear didn’t sell the products imported into a foreign country, thus the warranty is void. Even with a weak dollar, it costs a pretty penny to fly over a repair guy to replace the tweeter on your new Revel Salon2s that you installed in your London flat.

Experts suggest the sub-prime loan market will take a year or two to sort itself out, but the weak dollar might not get much stronger as Wall Street seems to be looking for The Fed to drop the lending rate even more, thus making the dollar even more weak. This results in import gear being more and more expensive for American buyers, but also makes American-made gear more attractive to foreign markets, which can be larger than the domestic market. High-end audio and video companies will need to keep their eyes on the ball as the market corrects as there are tens of millions of Generation Xers still buying homes and Boomers cashing in their retirement funds looking for luxury items - assuming the value is there.

by: Jerry Del Colliano