Success of DVD Players Proves a Mixed Blessing

No product has been as bittersweet for the consumer electronics industry as the DVD player.

Drawn to the sharp pictures and cinematic sound, consumers have bought up DVD players faster than any other electronic device in history. Even though the players became widely available in the United States only 5 1/2 years ago, more than 46 million homes now have one attached to a TV or a computer monitor.

But sales have skyrocketed in large part because prices have plummeted. In turn, so have manufacturers’ profits. As no-name, no-frills brands have flooded stores, the Japanese and European electronics giants that invented DVD have watched their profit margins get squeezed in record time.

Retailers’ profits have mostly evaporated, too, as the average price of a DVD player has fallen from $491 in 1997 to an estimated $118 today, according to NPD Intelect, a research firm. Entry-level units sell for $59 or less.

“The joke is you’re going to get a free DVD player with the purchase of a DVD [movie] pretty soon,” said Noah Herschman, vice president for video at Tweeter Home Entertainment Group of Canton, Mass.

“You can buy a DVD player that has a laser and all sorts of advanced technology ... for less money than it costs to buy a necktie,” he added. “It doesn’t make any sense.”

Even worse for consumer electronics makers and retailers, the DVD experience may be a harbinger of things to come. Competition at the market’s low end is intensifying for all sorts of digital gear, fueled in part by low-wage assembly plants sprouting up across China.

Faced with this difficult situation, many manufacturers and merchants hope to widen their profit margins again by enticing consumers to buy something more than just a budget DVD player.

“You survive by making new technologies,” explained Andy Parsons, a senior vice president at Pioneer Electronics Inc. in Long Beach.

One area with potential is DVD recorders. Mike Mohan, director of audio-video merchandising for Good Guys Inc. of Alameda, predicts that more DVD recorders than players will be on the market within two years. And he expects them to sell for $200 to $300 per unit.

Meanwhile, at the International Consumer Electronics Show this week in Las Vegas, an array of more expensive DVD machines will be on display. Among their features:

* High definition: At least two companies -- Samsung Electronics Co. and Philips Electronics -- plan to introduce DVD players this year that convert standard DVD movies into simulated high-definition pictures when viewed on an HDTV set.

Next year, the first DVD players capable of playing true high-definition discs are expected to arrive. But manufacturers have split into two camps that are backing incompatible high-definition formats, potentially slowing the emergence of the new generation of discs.

* Hard-drive recording: Several manufacturers, including Toshiba Corp. and Apex Digital Inc., have or soon will offer DVD recorders with built-in hard drives for temporarily storing programs. And Thomson, which makes RCA products, has two types of hard-drive-equipped DVD players in the works: one for recording TV, the other for storing music in a digital jukebox. The latter also will play radio stations from the Internet.

* Home networking: Sonicblue Inc. plans to introduce a DVD player soon that can connect to a home network. The device lets consumers move digital music and movies from their computers or the Internet to their stereos and TV sets.

Herschman of Tweeter Home Entertainment, a retailer that caters to a high-end clientele, said gadget lovers and videophiles are willing to pay a premium for DVD players that offer extra features or boast superior picture quality.

So far, however, most consumers have resisted paying more for such enhancements. And low-cost manufacturers already are setting their sights on DVD recorders, threatening to slash prices and profit margins in that arena as well.

Fierce competition has long been a hallmark of the consumer electronics market. Prices have dropped over time in virtually every product category. According to some industry executives, though, DVD players have taken that trend to an extreme, with prices falling faster and further than ever before.

In many cases, DVD technology has been reduced to an add-on in other products, such as TV sets and digital video recorders. “Probably quicker than we wanted to, we’ve been pushed into making DVD a feature of other things,” said David H. Arland, director of government and public relations for Thomson.

It wasn’t supposed to be like this.

Sony Corp., Pioneer and Thomson were three of the nine consumer electronics companies that developed the DVD format in 1995 with Time Warner. Sales of TV-oriented DVD players took off, hitting 1 million in the first year of widespread availability.

“It was the savior of the industry,” said Claude Frank, director of audio-video product marketing for Samsung Electronics America Inc. “Everyone was touting how great it was, that it would bring profitability back.”

Instead, the high-priced players lured new manufacturers into the fray, many of them setting slim profit margins for the sake of high volume. These companies typically bought components from independent suppliers and even their competitors.

And with so much of a DVD player based on industry standards, the upstarts could build models that were hard to differentiate from the established firms’ basic offerings, said Sharon Taylor, a video product manager for Santa Clara, Calif.-based Sonicblue.

Take, for instance, Apex Digital of Ontario. Using low-cost Chinese factories and lean operations, it was able to grab chunks of the DVD market with players priced far below those of its bigger rivals.

Yet Apex hasn’t been solely a cheap provider. Its devices also caught the attention of music-loving gadget freaks by playing homemade CDs with tunes downloaded from the Internet. As a result, noted Apex spokesman Colton Manley, electronics chain Circuit City Stores couldn’t keep the Apex players on the shelves.

The company’s low-margin, high-volume strategy has worked: Since November 2001, Apex has sold more DVD players than any other firm, Manley said.

Many retailers have tried to use the Apex players and other low-price entries as “loss leaders” -- a way to draw people into stores, in the hopes of selling them either a more expensive DVD player or a bunch of DVD movies. The movies have sold well, but the souped-up DVD players haven’t.

Frank, the Samsung executive, said he recently discussed the situation with a regional consumer electronics dealer known for selling higher-end gear.

“The gentleman referred to the product as ‘a sewer of a category.’ That’s how it’s progressed in five years -- from a savior of the industry to a sewer of a category.”