How Faulty Marketing Has Stalled TV Sales

Eager to boost profits and prod shoppers to upgrade, television manufacturers last year offered an alphabet soup of new technologies and TV features. Panasonic (PC), Sony (SNE), and other makers plugged big screens that required glasses to see movies in 3D, though there was scant content available in the format. Later in the year, Sony hyped sets using software from Google (GOOG), forcing shoppers to figure out how Google TV might differ from other Web-connected sets—including other Sony models. By the holiday season, techie jargon like LCD, LED, Wi-Fi-capable, widget-equipped, and Internet-ready became a marketing Babel used to convince consumers they needed to buy new models—often at price premiums of up to 50 percent.

Unfortunately for electronics retailers like Best Buy (BBY), that's resulted in aisles still stacked high with unsold flat-screens after one of the worst TV sales years in a decade. The plethora of choices—and marketing pitches—simply overwhelmed consumers, says Paul Gagnon, director of North America TV research for market tracker DisplaySearch. "Manufacturers threw in everything but the kitchen sink in terms of new technologies," he says, "but the industry made such a big step without lowering prices that consumers figured they'd just wait to see how it shakes out."

North American sales of sets rose just 0.4 percent through September. The most popular category, LCD TVs, fared worse: Shipments actually logged their first annual decline since the technology was introduced in 2006. Samsung, Sharp Electronics, and other makers blundered by pushing a pricier LCD technology using light-emitting diodes while still selling the older technology, researcher iSuppli says. Rather than choose, consumers turned to lower-priced plasma sets, boosting sales for a mature technology that most makers had written off for dead.

With two-thirds of U.S. households already owning flat-screen sets, the industry is taking radical steps to boost Americans' appetite for upgrades. Before the holidays, Best Buy scrapped most fees it imposed for returning items. It followed on Jan. 10 with an "obsolescence protection plan" that promises consumers a credit of up to 50 percent of the purchase price of televisions and other electronics that can be applied toward a new model, depending on how many months pass before they upgrade. "There's a fair number of consumers on the bubble, not quite willing to make a purchase because they fear some other new thing will come down very quickly," says George Sherman, Best Buy's senior vice-president of services.

The plan, which charges an up-front fee of 7 percent to 20 percent of the price for TVs, will offer peace of mind to shoppers worried that a purchase could be out of date within a year, Sherman says. In a Best Buy-commissioned study by Impulse Research, 40 percent of consumers surveyed said concerns about technology becoming outdated have likely prevented them, or would prevent them, from buying electronic products such as TVs.

The new approach is risky. If used sets from returns flood mature markets such as the U.S. and Europe, it could crimp overall sales growth and hurt manufacturer profits, DisplaySearch's Gagnon says: "In this very new territory, Best Buy may encourage upgrading but ultimately cannibalize the market."

Top manufacturers such as Samsung and Panasonic are hedging their bets. They're introducing more models, but at different price points that let consumers pick the technologies that interest them most. "Last year we launched the world's first full HD 3D TV. That's a lot of initials," jokes Boo-Keun Yoon, president of Samsung's Visual Display Business. The company this year will offer 40 new models in different sizes, price ranges, and technology configurations. That includes an $850 50-inch 3D plasma set, rising to an ultrathin 75-inch LED 3D Web-enabled unit priced north of $4,000.

Uncertainty over whether shoppers will warm to the new marketing plans is pushing TV makers to keep inventories lean. Production in the first three months of 2011 is expected to fall 12 percent, according to a DisplaySearch survey. One lesson TV makers seem to have learned is not to assume that if you build it, consumers will come. Panasonic has decided not to emphasize new features without clearly explaining that upgrading still allows buyers to use their TVs as they always have, says Joseph M. Taylor, chief executive officer of its U.S. division. "In the end we had to change our messaging that our 3D sets also offer the best 2D experience people were going to get," he says.

The bottom line: TV makers introduced competing technologies last year, confusing consumers. Now the industry is working to ease fears about buying.

    Before it's here, it's on the Bloomberg Terminal.