CE Outlook 2007: Out with the Old, In with the New

By Suzanne Deffree -- Electronic News, 12/19/2006

In just a few weeks, New Year’s Eve will roll around and at the strike of midnight, as the ball drops in Times Square, people crowded onto the New York streets will belt out "Auld Lang Syne," or, that is to say, their own version of "Auld Lang Syne.”

The Scotland-born ditty ranks as one of the most popular songs that people don’t know the lyrics to. "Auld Lang Syne" literally translates as "old long since" and means "times gone by," according to Fact Monster.  The song asks if old friends and times will be forgotten as people spread apart and promises to remember those of the past with fondness.

As holiday sales come to a close, the same could be sung of 2006’s consumer electronics (CE) industry. As we move into 2007, many maturing technologies that have served the industry well for years are starting to lose their impact on sales and, while these technologies contributed heavily to the 2006 CE year, new opportunities wait in 2007 that could reenergize the market.

“On the one hand, [2006] has been an OK year in general, not as strong as some of the previous years. But on the other hand, it’s been bad in the sense that these attempts to introduce next generations in several areas have really stalled,” said Chris Crotty
iSuppli’s senior analyst for consumer electronics, noting the gaming and blue-laser DVD markets.

“If you are a consumer right now and want to buy something cutting edge, you can’t or it’s very risky. With the gaming systems, it’s a basic problem: You can’t get them. With next-generation DVD, there’s a lot of confusion out there, and rightly so,” the analyst said referring to the standards battle between Blu-ray  and HD DVD. “Consumers are waiting to see if somebody wins – which I don’t think will happen – or the more likely scenario, which is by this time next year we’ll see equipment out there that can handle both formats.”

For that reason, the CE 2006 market was driven by familiar technologies like MP3 players, TVs and digital cameras. iSuppli estimates for the year show factory revenue growth of 3 percent to 4 percent following a very strong 2005. The Consumer Electronic Association (CEA), meanwhile, is projecting 12 percent to 14 percent year-over-year increases in shipment revenues

“What’s providing the lift there are mainstream consumers now paying attention to categories that have been around for a few years, but are now just being adopted by mainstream consumers, like iPods, flat panel TVs, laptops, digital cameras, a whole suite of products,” said Sean Wargo, director of industry analysis at the CEA.

“The good news is it’s not just any one thing that’s driving the market and that makes us less vulnerable to, say, a supply chain issue in one category or lessening demand for a product,” Wargo said.

These technologies have both come down in price and have become everyday items with high ease of use factors, which encouraged consumer adoption and sales increases, he added. However, these older technologies will not sustain the new year’s CE market.

“What were expecting in ’07 and years beyond is a lot of the benefit we have gotten from consumers buying these technologies is sort of eroding away because the price points are coming down very quickly,” Wargo said. “Because of the price declines, we do expect next year to be a lower percentage growth, still historically high around 7 percent or 9 percent, but lower than this great year. What would prove us wrong is if consumers maintain momentum and still buy up even with price declines. It doesn’t look like there are going to be innovations [in these products] next year that will turn the tide in favor of a net year of year price increases.”

‘The Storm Before the Even Bigger Storm’

What will bring next year’s growth, said iSuppli’s Crotty, is increased supply for next-generation gaming systems like the scarce Nintendo Wii and Sony’s Playstation 3, and, while no end to the next-generation DVD wars is in sight, combined Blu-ray and HD DVD standard players that will promote usage of blue-laser DVD.

“The next-generation video game market will be growing well in 2007. Also, you’ll see better results for next-generation DVD, another market that is just starting in 2006. By this time next year, players that handle both will be something we see in the market. I call what’s happening now ‘the storm before the even bigger storm’ because we are just getting into the next-generation battles for DVD and video game,” Crotty said.

One significant opportunity Crotty notes for 2007 – and a possible obstacle to consumer adoption of blue-laser DVD technology – is Apple’s iTV, expected in January. iTV with built in Wi-Fi network capabilities is set to convey content downloaded from iTunes by connecting customers' computers and home entertainment systems. The $299 box will be controlled by an Apple remote that synchs up with a user's living room entertainment system.

“That’s really the first product that enables consumers to easily take their downloaded video content and use it in their living room without having to have a PC in their living room, which is something consumers seem to not want. Seeing how well iTV is adopted will be critical. If iTV does well you’ll see a lot of other types of products that do that come out and you’ll see the continuation of what I have observed as an acceleration of movie download trials this year. You could really see 2007 be a big sea change for more and more content being done online instead of the plastic disk. These DVD guys are so busy fighting each other over next-generation DVD technology that they are missing their common enemy – online delivery,” Crotty said.

“If you look at the volume of video content Apple has moved through iTunes, that suggests to me that there is a pent up demand for people who are interested in a product like iTV that would allow them to move the content into the living rooms pretty easily. That will be a real key product to watch.”

While CEA’s Wargo is less enthusiastic about iTV and maintains that the physical format is what the consumer prefers, he also sees iTV as a possible obstacle to next-generation DVD.

“The early adopter is the most important segment at the roll out of any new technology. If the early adopter is distracted by other options, it does become more of a challenge. But the differentiator is that these formats offer high definition. It still appears to be a few years away from being able to download high definition movies,” he said. “The physical format appears to be the preferred universal format, but the question is how fast that will change.”

This story is part of Electronic News’ 2007 outlook series. For looks at other vertical markets, click here.