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Prices Are Falling … And That's a Good Thing
By Suzanne Deffree -- Electronic News, 4/7/2005
Pricing pressure has hit the semiconductor industry across the board, and consumer electronics are no exception.
The retail prices of several consumer electronics hit their lowest level in January since last July, a full 1 percent drop compared to December 2004, according to the latest NPD Consumer Electronics Price Watch, a monthly pricing monitor from researchers at The NPD Group.
The firm further reported that when compared with January 2004 and January 2003, prices remain far below those totals with the average selling price down 19 percent and 36 percent, respectively. The total cost of a "basket" of 27 electronics goods, including TVs, PCs, cameras and media players, tracked by the NPD CE Price Watch is now $10,825, a deep cut from the $16,999 cost in January 2003.
But have no fear, Stephen Baker, director of industry analysis at NPD, says this isn't necessarily a bad thing for the electronics market.
"Prices fall all the time. Obviously electronics are very susceptible to price declines over time. That doesn't necessarily mean that overall prices are falling. As some products fall, new items on the higher end come in that offer different levels of features and benefits. You try to manage to an average versus just letting individual items fall in price," he said.
Further, Baker points out that as products come down in price, sales tend to increase, which, for semiconductor players, means higher silicon volumes.
"The real issue for any component manufacturer in the digital age has always been the ability to generate large volumes to cover the cost of what is very, very expensive manufacturing -- the cost to build plants goes up and up, the cost to get these products to market goes up and up, and the only way to cover those costs is to have a very big market," he said. "One of the ways you get a big market to sell into is to reduce prices. That doesn't necessarily mean you are going to lose anything."
The analyst offered the example of LCD televisions a market that has experienced component prices decrease substantially in the last year on specific sizes while larger sizes have been introduced at higher price tags.
"You can make the argument that the average price, typically of an LCD television, isn't necessarily falling. While we are selling lots of 20-inch TVs, in the last year we've introduced all sorts of sizes, 30-inches and above, that sell for considerably more. As you bring those products in and you have a mix, you can see -- even if every single product in the category went down in price -- on average, the overall prices come up."
Pressure in the Component World
There is a flip side to this, however. As end-product prices drop, price pressure on components increases, notes Chris Day, general manager and senior director of marketing for advanced media processing applications at Philips Semiconductors.
"As these products come down in price, the volumes go up, we ship more silicon, so in the most simple analysis, it's a positive trend," Day said. "On the other hand, when the prices of the end consumer products go down, there's greater pressure on semiconductor suppliers to offer an overall silicon solution at a lower price, as well."
For example, "If a television set cost $3,000 a year ago and today costs $1,000, there's a lot of pressure on all the items that make up the television set to go down in price," he remarked.
On top of the price pressure, end products are becoming more complex and versatile in their uses, meaning semiconductor players have to produce chips that do more at lower prices. Ease-of-use features, which further drive the complexity of the software and hardware, complicate the short production schedule for components.
One way Philips gets around this, Day said, is through flexible, programmable solutions.
"One of the things we are focusing on in the media processor group is a highly programmable media processor, so everything gets done in software on the chip. That's important because with pressure on prices and pressure on getting new models to market quickly, those things have to be done in software," he said. "If you have to redesign the hardware every six months, that is cost prohibitive and makes it difficult to get products to market quickly."
Software is often a hidden cost, a second thought to companies purchasing components behind physical silicon chip costs. Now the software costs are beginning to be as or more important than the physical silicon costs, argues Day.
"The chip may be $5, but you may have millions of dollars invested in the software that's running on that. Those millions of dollars have to be anatomized over the units shipped," he said.
"Time to market, flexibility and the software are increasingly the major issues. Much more important than shaving 10 cents off the cost of the chip is being able to use the same chip for multiple applications and share your software investment -- that is way more important at this point."
What Products Fell
According to the NPD CE Price Watch the largest drop in price in January was the 42-inch LED plasma screen, which fell 7 percent. The 17-inch LCD PC monitor also showed a large price erosion, dropping 5 percent to a record low of $351. While the companion technology product, the 20-inch LCD TV, saw a price increase in January, it was less than 1 percent, as this product has stayed near its all-time lows for three consecutive months, the firm reported. Desktop PC prices also fell, seeing a sharp 3 percent decline to $682, the second straight month of retail prices below $700.
NPD's Baker expects the price declines of consumer end products to continue throughout 2005.
"If they don't, I think we'll have some big revenue problems," he said. "Prices are going to continue to fall -- some categories more than others -- but in general, we don't see any reason for us to hit the bottom on that price trend."
