The Digital TV Battle: PC Players Edge in on a High Margin World


Add an FCC mandate expected to drive digital TV adoption and an absurd amount of consumer confusion, and you’re left with what feels like a rickety joy ride on the Cyclone after lunch. It is almost enough to make you long for something predictable and unchanging – like a nice, bulky CRT set.

Unfortunately, the industry joy ride is just beginning. The latest loop in the digital TV world? PC companies.

PC players are adept at churning high volumes on razor-thin profits. This gives computer makers an edge over traditional consumer electronic manufacturers who are accustomed to lengthy supply chains and hefty double-digit profit margins.

The result is a significant price difference on shelves. In the past two years, Dell and Gateway have undercut market pricing by as much as 50%. These companies are at the forefront of a new wave of cut-throat competitors, battling the status quo with lower price points, and forcing traditional players to slash their margins in order to compete.

Furthermore, it looks like PC-branded TVs are here to stay. This past June, Dell officially announced its entrance into the plasma market. And HP, the category’s newest member, will have its flat panels on store shelves within the next couple weeks. At present, Gateway’s place in the market is the only unknown. The company has discontinued most of its consumer entertainment line, but has asserted it will stay in the plasma market, at least for the short term.

The bottom line is that PC companies are making inroads in the consumer electronics world. So the lingering question remains: can PC companies thrive over the long term?

To put it succinctly, yes. Beyond the obvious price advantage, PC companies have begun to tackle some of their biggest roadblocks (such as image quality and brand recognition), and are well equipped to battle traditional consumer electronic brands.

Head to Head Scorecard

Price: Who Has The Edge?

PC Companies (Obviously)

PC companies continue to offer compelling price advantages over traditional brands. The charts (below) show Dell and Gateway’s competitiveness in the LCD and plasma markets, respectively. In the 30-inch LCD space, Dell beats the average retail price by 47%. In the 50-inch plasma space, Gateway is ahead by 24%.

Eventually, PC companies will not be able to maintain this price gap. As overseas manufacturers invest in next-generation plants, panel production efficiency will increase and prices will drop. Consumer electronic (CE) companies presume that ramping up panel production and offering larger size panels are the answers.

However, panel production is just one step in a manufacturing process which includes many efficiency loopholes and mark-ups. Dell and HP have far fewer layers in the production cycle than traditional CE manufacturers, yielding a leaner business model and lower bottom line costs.

The diagram (below) reveals the differences in assembly processes between typical CE and PC brands.

Additionally, PC companies are accustomed to relying on margins in the single digits (compared to 30% for many appliance manufacturers). At a certain point, CE giants will be forced to shrink margins and streamline their entire production process in order to compete. When the flat panel market spirals into a price war, PC companies will be well equipped to beat out their CE rivals.

Image Quality: Who Has The Edge?

Traditional Players –But the Times, They are a Changin’

Picture quality has been one of the last strongholds for traditional TV players. So far, no computer company has produced a model that rivals the crisp, sharp image of a high-end Sony. However, the image quality gap is gradually shrinking, thanks to the growing competitiveness of companies that produce video processing chips.

These suppliers are gaining expertise, dropping prices, and selling to companies like Dell that scour the world for the best products to integrate into their displays. As video processors are fine-tuned and enhanced, the "image gap" between a Dell and a Gateway or a Sony and a Sharp will be minimized.

In fact, there are signs that this gap is already shrinking: A recent study by the Japan Picture Quality and Technology Laboratory compared TVs made by both traditional and PC manufacturers, including Sony and Dell. The TV’s were measured in 15 different image-related areas. The overwhelming finding was that PC companies are nipping at the heels of TV makers.

"A comparative evaluation of image quality in LCD TVs released by both groups over the past six months shows that some of the products from the PC group are coming very close indeed. While the televisions from the appliance firms still hold the advantage when it comes to image quality, [consumer electronics manufacturers] can hardly afford to relax."

Source: Japan Picture Quality and Technology Laboratory, 2004

Of the nine competing companies, a top-ranking PC maker came in fourth place, and in most areas, performed equally to the top-ranking Sony. In fact, there was only one area – video contrast – in which PC companies consistently fell short. Total scores (below) reflect 15 categories (each worth 5 points) for a perfect score of 75.

Distribution: Who Has The Edge?

Take Away Dell, and We Predict a Tie

Dell will not admit it, but a retail presence is crucial in the TV space. TVs are not like computers, and cannot be measured by feeds and speeds like gigahertz and RAM. Rather, image quality, with its fifteen or more characteristics, is a fuzzy area that consumers need to assess in person. On paper, a viewing angle may read 160 degrees. But when you look at the screen from the side, the color intensity on many sets can vary significantly. This is just one example of how picture quality is difficult to quantify and measure in hard-line facts.

However, other PC companies are well equipped to tackle the retail market. HP’s brand name is already strong with consumers, and its existing retail relationships will help it gain major inroads in the digital TV space. Gateway has partnered with Best Buy and Good Guys, and is focusing on expanding its distribution over the next year. Ultimately, Dell will be the only PC vendor in the space without a retail presence.

Furthermore, the market is ripe for PC-like price tags. Currently, price is the single biggest barrier preventing flat panels from flying off shelves. Best Buy recently announced it is boosting its flat panel assortment by 50%. In doing so, Best Buy is expanding its offering to include lower-cost brands – a clear sign that PC companies are welcome in the space.

Additionally, discount stores such as Wal-Mart are growing their consumer electronics departments. The result is that TVs spilling into new outlets that attract consumers looking for lower price points: a perfect venue for PC brands. As the retail market expands, many of the traditional disadvantages of PC companies will be minimized.

Brand Image: Who Has The Edge?

Neither Group

A strong brand name has traditionally been important in the consumer electronics space. Consumers cite reliability and trust as major factors in purchase decisions. Sony is a classic example of a strong brand. The company’s heritage in consumer electronics is a major driver of its success in the TV market.

But Dell and HP (and even Gateway in spite of its recent troubles) also have powerful brand names; the kind which are more than capable of crossing the PC/TV divide. Such "brand elasticity" will give these companies a solid growth platform as they look to expand in the market.

Digital convergence can only help this process. Over the next couple years, the lines between TVs and PC’s will blur together. Companies such as HP, Intel, and Microsoft are fighting hard for the concept of the "media hub" – the home center where all appliances are networked and used together. As this trend develops, any prejudgments consumers may have about PC manufacturers operating in the TV space will begin to fall away. Digital convergence will do wonders for PC brands as they attempt to strengthen their footprint in the TV space.

And the winner is…

The Consumer

Until recently, mainstream TV technology has been relatively static. But as new, thinner sets drop in price, and the market moves to digital programming, the demand for televisions will sky-rocket. This leaves plenty of room for both traditional TV makers and PC companies to make their mark. The industry is ripe with opportunity.

Granted, PC companies still face several challenges. PC companies must continue to improve image quality, strengthen retail partnerships, and enhance brand recognition in the TV space through marketing efforts and the push towards digital convergence. But all the pieces are in place for of this to happen. It is only a matter of time.

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