Flat-panel TVs used to be relegated to the realm of science fiction. Even when TVs so thin you can hang them on a wall became available about three years ago, they might as well have been from outer space: They cost as much as a new car, and consumers bought only a handful.
That's no longer the case. Flat-panel TVs are the fastest-growing category for the nation's largest consumer-electronics retailer, Best Buy (BBY). "There's nothing close to them," says Bill Cody, its vice-president for home theater. While 2003's total consumer-electronics sales will rise only 1%, to $95 billion, according to the Consumer Electronics Assn., flat-panel TV sales are growing at a double-digit rate. Best Buy now carries 40 models -- up from only one as recently as 2001.
SEVERAL IN EVERY HOUSE? Flat panels are so popular in part because they now sell for a fraction of what they did three years ago -- the result of both rising competition and improved economies of scale. Assuming that their prices continue to drop by 30% annually, as they have for the past three years, their market share, now 3%, could exceed that of regular TVs by the end of the decade, predicts Matt Dever, vice-president for product planning at TV maker Pioneer (PIO).
"We're experiencing a transition in television technology that we've never seen before," says Gary Feather, a director at Sharp Laboratories of America, the research arm of one the world's largest producers of flat-panel TVs. Because they're not only extra crisp but svelte and decorative as well, Feather adds, the devices eventually could become an accoutrement for several rooms in a house. That could also help boost flat-panel sales, now 1 million units a year in North America, to something closer to 13 million in 2007, predicts electronics consultancy iSuppli/Stanford Resources.
This opportunity is attracting plenty of new entrants to the traditionally insular TV business. Chinese makers of unbranded TVs are lining up. So are a number of PC manufacturers, including Gateway (GTW) and Dell (DELL), the world's largest computer maker. Hewlett-Packard (HPQ) is expected to unveil its first flat-panel TV in January. PC outfits already use liquid crystal displays (LCDs) -- one of two major types of flat-panel TV screens -- in desktop and notebook monitors, so flat-panel TVs are a logical next step for them.
A NEW NO. 1. A smaller share of flat-panel TVs use so-called plasma technology, which has been around longer. Plasma screens, which are less expensive than LCDs, are used predominantly in TVs wider than 32 inches. But LCDs generally offer longer life and better performance, says Tom Edwards, an analyst at market consultancy NPD Group.
PC producers appear to enjoy a number of advantages over traditional TV makers. Many computer manufacturers, such as Dell, sell directly to consumers, which gives them a 10% to 20% cost advantage. They're also accustomed to 15% gross margins, vs. the 30% margins of traditional TV makers, and they don't mind buying market share by lowering prices.
In November of 2002, Gateway introduced a 42-inch plasma TV for $2,999 -- at a time when the industry's going price was closer to $4,000. As a result, Gateway is now America's No. 1 seller of plasma TVs -- ahead of traditional players such as Panasonic, Sony (SNE), Pioneer, and Samsung, according to NPD Group. Stacey Widlitz, an analyst with Fulcrum Global Partners in New York, estimates that as prices on both regular and flat-panel TVs continue to recede, TV makers' gross profits, which are expected to rise 2% this year, will fall 5% in 2004.
"MASSIVE CHANGE." That could have serious implications for the existing players. TV makers with smaller market shares -- such as Pioneer, which holds 13% of the world market for plasma TVs -- could eventually exit, predicts Martin Reynolds, an analyst with market consultancy Gartner. Such manufacturers might have a hard time competing with the newcomers on cost, given their less advantageous economies of scale. Pioneer denies any such plans. "This is part of our future, and our commitment is global," says Russ Johnston, senior vice-president for home-entertainment marketing.
At the very least, though, traditional TV makers may have to revamp their businesses. In October, in an effort to stop its profits from sliding, Sony announced a huge restructuring, involving cuts of 20,000 jobs, or 13% of its global workforce, over the next three years. Sony will also close its regular TV factories in Japan. That's likely just the beginning, says Reynolds, adding: "It's a massive change they're facing."
Another way to compete is to collaborate. On Dec. 4, office-equipment maker Cannon (CAJ) and computing giant Toshiba announced a joint venture to build a factory that will make ultrathin, flat-panel TVs based on a new technology called surface-conduction electron-emitter display (SED). Their TVs will be only an inch thick -- about one-third the width of average plasma or LCD screens.
REDESIGNING STORES. And in October, Sony and Samsung agreed to jointly build a $1.8 billion factory for making 57-inch LCD TVs in South Korea. The plant, due to open in 2005, will pump out three times the number of screens as a typical factory does today. Having two huge customers will ensure that the plant can run at full capacity, says Jim Sanduski, a vice-president for marketing with Samsung Electronics America.
In another approach, Sharp will open a new factory in January that will make large LCD screens and assemble them into TV sets all at one site -- instead of hauling the parts elsewhere for assembly. Bob Scaglione, vice-president for consumer-electronics marketing at Sharp Electronics Manufacturing Co. of America, claims that such a setup will be the industry's first -- and will deliver major cost savings.
Consumer-electronics retailers are hustling as well to redesign their stores (where 95% of TVs are still sold) -- in hopes of fending off both online competitors and discounters like Wal-Mart (WMT) and Costco (COST), which have started carrying flat-panel TVs. Encouraging in-store purchases is crucial, since customers who buy TVs often also pick up DVD players and other gadgets.
Thus, several months ago Best Buy began testing a new store design that features simulated rooms in a house in order to show how various electronics devices can work together. If the design proves successful during the holiday season, it could be implemented companywide.
AGGRESSIVE NEWCOMERS. During this year's holidays, traditional TV outfits should still have the upper hand. So far, newcomers offer only limited models -- two or three vs. 30 from Sharp. And store checks at Wal-Mart show that flat-panel TVs are often stacked up in boxes in a corner of the store, according to Fulcrum. "We believe that our customers have learned that they can turn to Wal-Mart for all their electronics needs at an outstanding value," says a Wal-Mart spokesperson in an e-mail.
In any case, traditional retailers are often known for their customer service -- critical for consumers who intend to mount an expensive TV on a wall. "Most consumers purchasing a high-end display unit are more comfortable buying an established brand that offers the best in features and quality performance," writes Ed Wolff, Panasonic's vice-president for the display group, in an e-mail.
Yet, it may only be a matter of time before the new players catch up. Dell, for one, is a world-renowned brand. The PC king, which introduced its first 17-inch flat-panel TV in October, unveiled another model in November -- and will come out with more TVs next year, says Scott W. Hardy, senior manager for peripherals marketing. He adds: "We're very pleased with our [sales] so far." For consumers, that may presage the best of two worlds: better products, at steadily declining prices. By Olga Kharif in Portland, Ore.