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The flat-screen TV in your future
In a few years, these pricey gadgets will become so cheap that they'll replace the traditional television altogether. Here are the potential winners.
By Michael Brush
You know how home electronics companies get you to replace perfectly fine gear every so often by bringing out improved versions of the same thing?
Well, brace yourself. Theyre at it again.
Over the next five years, expect to be shelling out several hundred dollars for a book-thin, flat-panel TV with a picture so crisp it will make you feel like you have the vision of a fighter pilot.
Walk into most any Circuit City (CC, news, msgs) store these days and you can already introduce yourself to the liquid crystal display (LCD) TV format that will be taking over the living room this decade. Right now, these cutting-edge TVs are so small, they look like desktop computer monitors oddly out of place in the TV section on the showroom floor.
Take a closer look, and youll see that these tiny liquid crystal monitors are really the whole TV, with the tuner and everything else built inside. Youll also notice they are expensive. Right now, you may pay well over $1,000 for a 20-inch screen or less. Thats a lot compared to standard cathode ray tube (CRT), which cost a third as much for twice the size.
Flat-screen sales are brisk -- and growing
But take note: These little upstarts are moving off the shelves fast.
Why are they so popular? First, because they use advance imaging technology, the picture is a lot sharper than what you see on CRT screens. Its just wowwee, a unique wow, says Hugh Evans, a portfolio manager at T. Rowe Price, which owns shares of some of the companies making parts used in LCD TVs. It is like before I was watching without glasses, and now I am watching with glasses. The sharpness is that good.
Customers also buy them because the compact size means they can go in parts of the house where TVs have rarely been before, says Noah Herschman, vice president of strategic business development at Tweeter Home Entertainment (TWTR, news, msgs). Tweeter, an upmarket home electronics retailer that operates 175 stores in 21 states, was one of the first retailers to carry a broad range of LCD TVs. People are putting them in bathrooms, workshops, kitchens, Herschman says. Wouldnt it be convenient to have the cooking show in front of you when you are cooking? Early adopters -- tech fans who always have to buy the latest gadgets -- are snapping up LCD TVs just because they look cool.
Prices still must come down
But to really catch the eye of the mainstream consumer, LCD TVs will have to come down in price considerably. How much, before they start selling in mass volume?
Track the history of consumer demand for other kinds of home electronics gadgets, and you learn two basic lessons, says Allen Alley, the chief executive of Pixelworks (PXLW, news, msgs) in Tualatin, Ore., one of the big suppliers of computer chips used in LCD TVs.
One is that $1,000 is a magic price point, says Alley. Above that, it seems, its just considered a luxury item. And below, it becomes much more of a mass market item. Next lesson: When a home electronics product captures 5% of the market, theres enough market awareness for sales to really take off.
Often, the two tipping points happen at the same time. In 2000, the price of an LCD computer monitor crossed below $1,000 and it hit 5% market penetration, and sales of LCD desktop monitors have gone straight north from there, Alley says.
You can already buy 20-inch LCD TVs for under $1,000, but that doesnt count. It's the more popular -- and more convenient -- 30-inch monitors that really count. When will their price cross below Alley's magic $1,000 line?
No one knows for sure, but heres a guess. For the third straight year next year, producers of LCD TVs will be increasing spending on new factories by more than 20%, says Ross Young, an analyst with DisplaySearch, a market research firm that focuses on the flat-panel display industry. All that new capacity should finally drive LCD prices down low enough for the average Joe to start buying by the end of 2004. Given the number of LCD fabs (fabrication facilities) coming on line, I project that, by Christmas 2004, we will have a $1,000 30-inch LCD TV," says Alley. We will have nice growth until then, but that is where we think it will really be taking off.
As the cost of bigger LCD TVs comes down, they will displace CRT TVs. They'll also replace plasma -- a separate technology that dominates wide-screen TVs today. At some point, youre going to have to buy an LCD because there arent going to be any more CRT TVs made, says Tweeters Herschman. In two years, you are going to see 70% of the TVs will be flat-panel, either LCD or plasma. And one year after that, 100%.
It is bright, it is small, it is getting better, and all these things will make it a sure-fire hit, says Sean Wargo, who tracks home electronics trends for the Consumer Electronics Association. LCD TVs also consume less power, and they will be easier on the environment than CRTs, another potential attraction.
Says Jim Babb, a spokesman for retail giant Circuit City: Our CEO has said on several occasions he thinks this is going to be a flat-panel Christmas. Flat-panel is definitely one of our growth categories.
The industry projections -- never a certainty, of course -- are awfully impressive. Worldwide LCD TV sales will rise to 4 million units this year, from 1.35 million last year, says DisplaySearchs Young. And they will hit 35 million a year by 2007, he thinks.
The potential market is so big that it is just mind numbing, says T. Rowe Prices Hugh Evans.
Chip makers: getting ready for a big opportunity
So what is the best way to play this trend? Evans likes the smaller, specialized chip companies because they make for a more focused play on this trend. Once LCD TV sales hit 40 million a year, you are talking about a billion-dollar opportunity for the small chip makers, he says.
The cleanest play among the specialized chip makers is Trident Microsystems (TRID, news, msgs) of Sunnyvale, Calif., which recently exited the business of making graphics and video controllers. Now its focusing solely on chips used in LCD, plasma, digital and advanced CRT TVs.
Tridents claim to fame is the chip it makes for digitally processed television (DPTV). The chip integrates most of the functions needed to run advanced TVs, from color decoding and size adjustments to picture-in-picture. At this point, our chip is the one with the highest integration level, says Jung-Herng Chang, president of Trident Technologies, the Trident Microsystems subsidiary that produces the DPTV chips. That makes its chips relatively cheap, which has helped win over customers like Sony (SNE, news, msgs) and Samsung (SSNLF, news, msgs). The company has a strong presence in the growing Chinese consumer market, with more than half its 257 employees based in China.
Moving down the list of specialized chip companies ranked by how much of their business comes from supplying the LCD TV market, next youll find Pixelworks. It gets about a quarter of its $120 million-a-year revenue from the TV market right now -- including LCD, plasma, rear projection and super-charged CRT TVs. Another 25% comes from chips used in flat-panel computer monitors; half comes from chips powering projectors used in the business world.
Like Trident, Pixelworks sells to Sony and to other major TV producers serving the Asian and European markets. The company sells a TV in a box, or a board with all the components a TV producer needs to get up to speed fast in developing and producing LCD TVs.
Genesis Microchip (GNSS, news, msgs) will be a significant supplier of LCD TV chips, but the Alviso, Calif., company takes in about 80% of its revenue from chips used in flat-panel computer monitors, where it controls about two-thirds of the market. Like Trident and Pixelworks, Genesis saw high double-digit growth in the sales of chips used in TVs in the most recent quarter.
The TV makers: Big is not necessarily better
Companies such as Sony, Panasonic and Samsung will be among the big producers of LCD TVs. But the benefits for them will be more muted because they sell so many other products, and there are so many LCD TV makers. A more targeted play on LCD TV production is Planar Systems (PLNR, news, msgs). The Beaverton, Ore., company has a long history of producing high-performance display panels used in health care, aerospace, defense and industrial markets.
Over the past few years, we have leveraged our knowledge in flat-panel displays to supply commercial products, says Balaji Krishnamurthy, Planar's chief executive. So far, this has mainly meant desktop monitors, but it also makes LCD TVs available at Tweeter. Planar can go after the LCD TV market aggressively, Krishnamurthy says, because -- unlike other TV producers -- it does not have a CRT TV line to worry about destroying.
But unfortunately for investors, Planar wont break out LCD TV sales, so its hard to track the companys progress. Itll need to see strong sales in LCD desktop and TVs to offset current sluggishness in its industrial and medical divisions.
High-end retailers have the first shot at success
Big home electronics retailers such as Best Buy (BBY, news, msgs) and Circuit City stand to benefit because the LCD TV wave will bring in more customers. "They are not as levered as the chip makers, but it drives floor traffic," says John LaForge, a technology analyst and money manager with the Phoenix-Hollister fund family in Sarasota, Fla.
But of all the consumer electronics retailers, Tweeter Home Entertainment may benefit the most in near term. Thats because it caters to early adapters by focusing on high-end home electronics gear. "Flat-panel in general (LCD and plasma) has gone from 6% of our business last year to 20% this year," says Herschman. "We have about a 12% market share, which is huge for us, because we have a 3% market share for consumer electronics."
Beyond the LCD TV market, however, Tweeter, faces challenging competition from the likes of Best Buy and Circuit City. Earlier this month, Tweeter reported a 6.8% decline in quarterly sales from stores open at least a year. On the other hand, there was some massive insider buying in the stock at around $5 eight months ago. The company has been working with former execs from Best Buy and Staples (SPLS, news, msgs) to turn the business around.
The risks: Will Asia undercut U.S. companies?
The big risk for the chipmakers -- Trident, Pixelworks and Genesis -- is that low-cost Asian producers will step in and undercut them on price.
The issue with flat-panel is you have these small Taiwanese manufacturers that always nip at their heels, says LaForge. These specialized chip companies are so leveraged to (high) average selling prices that when the prices turn down, they can really get clocked.
Ive never been comfortable that they can run fast enough to stay ahead of the competition, agrees Peter Conrad of Kopp Investment Advisors in Minneapolis. There are a lot companies in Taiwan that are gunning for these opportunities, and they are very competitive.
But the chipmakers say the threat in the market for chips used in TVs will be muted. The reason: Processing signals carrying images for TV are much more complicated than the processing signals used in personal computers. So more complex chips are required in the TV world, and, says Pixelworks Alley, that will make it harder for competitors to bring low-cost LCD TV chips to market.
Tridents Chang agrees but adds the low cost competitors face another, significant obstacle as well. Developments in the desktop computer world, he says, were dominated by a few big software and chip companies. So there are near-universal standards. Thus, in that segment, it has been easier for low-cost component makers to cook up knock-off parts than they might be able to do in the flat-screen TV market.
The TV manufacturers all have their own solutions, says Chang. You need to work with each of them to fine-tune your chip so it works on their platforms. A low-cost provider cant quickly go into this market and ramp up volume. That is not going to happen.
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