Growth of Home Entertainment Sector

TOP CONTRIBUTORS

Adam Farren

Jane Jiang

The technology breakthroughs of the past decade have changed the possibilities for home entertainment, and media firms, technology companies, and consumer retailers have all profited as the industry has grown. The introduction of high-definition visual technology, Video on demand, and increasingly interactive gaming has helped the home entertainment sector become an especially attractive part of consumer electronics. Not only is consumer demand high; home entertainment is a traditionally high-margin industry (especially the lucrative speaker cable sector), and new technology is bringing in even more interest and profit.

In addition to the traditional entertainment-specialized players in the sector, a number of familiar heavyweight tech companies have also been trying to break into the profitable business, chasing a goal of "digital convergence"--the unification of internet, TV/cable service, disk media storage (DVDs, high-def DVDs), hard drive storage, gaming, and audio in one high-use, high-expenditure room of the house. From cable companies, who offer bundle packages of high speed internet, TV, and phone lines in one integrated package, to movie studios, who now release their films in formats for regular TV, high definition, portable devices, and online downloading, firms in this industry are rethinking the applications and synergies of their products.

But for each advancement, there is an existing technology that suffers. Blu-ray may be hot today, but movie rental companies will suffer with the coming switch to digital downloads. CDs have all but disappeared as mp3's and iTunes dominate the market. The effects of breakthroughs can be drastic for existing firms, and the best known brand names today may not be those best positioned to profit tomorrow.

Who's Winning Now in Consumer Electronics

• Samsung , Sanyo Electric ADR (SANYY), Harman International Industries (HAR), Panasonic, Onkyo, and Yamaha are all major manufacturers of home entertainment/home theater equipment, including plasma TVs, LCDs (high-margin), multimedia projectors, DVD players, and other audio/electronic equipment.

• Best Buy, Circuit City Stores (CC), and Wal-Mart Stores (WMT) are the top retailers of home entertainment equipment and products.

• Directed Electronics (DEIX), Planar System's Runco, Audiovox (VOXX), and Sony (SNE) all do brisk, high-profit-margin business in home theater loudspeakers and a variety of other audio equipment. Directed Electronics and Runco are super high-end and have particularly high profit margins.

• DTS (DTSI), Dolby Laboratories (DLB), and Macrovision (MVSN) have competing technologies for surround sound and other home entertainment technologies.

• Logitech International S.A. (LOGI) makes mid-range remote controls for home theaters.

• Time Warner (TWX) and Comcast compete with The DirecTV Group (DTV) and Dish Network for pay-TV customers, constantly enhancing their Video on Demand and HD offerings to attract new subscribers.

• Blockbuster (BBI) and Netflix (NFLX) are the market leaders in rental service, offering conventional and hi-def DVDs and video games.

• Activision (ATVI) and Electronic Arts (ERTS) are the two largest video game producers, and their sales revenues continue to increase each year as they push each other to develop new titles. Advanced consoles make gaming increasingly realistic, while unconventional game play options are attracting new users to the industry.

Who Will Benefit in the Future

• Microsoft (MSFT), Apple (AAPL), and Intel (INTC) are among the giants who are trying to edge into the lucrative home entertainment market. Microsoft has been eyeing industry for a while, and its latest venture is a split effort between the Xbox 360 (HD-DVD playing capabilities) and Windows Vista (Media Center edition). Apple has introduced the Apple TV, which lets users play digital media on LCDs. And Intel has just launched its new Viiv (rhymes with "five") line of processors specifically targeted towards PCs used as media hubs.

• Circuit City Stores (CC) and Best Buy (BBY) are two retailers with big business in home entertainment electronics, and they will attempt to stay ahead of trends by marketing the latest high end products. Recently, for example, Best Buy decided to market Blu-ray discs prominently as the sole medium for high definition film.

• The DirecTV Group (DTV), Comcast (CMCSA), TiVo (TIVO), and Gemstar-TV Guide International (GMST) may all benefit from an upspike in home entertainment consumption as more viewers turn to on-demand and DVR service.

• Netflix (NFLX) has changed the dvd-rental industry over the past couple years through a direct-mail distribution system and has fended off some very strong competition from Blockbuster (BBI). A partnership with LG Electronics will allow it to provide a set-top box for online distribution.^[1] This move positions it in competition with Microsoft (MSFT), Apple (AAPL), and Intel (INTC) for control of the living room computer.

Who's In Trouble as Technology Gets Better

• Shares of Blockbuster (BBI) have hit an all-time low, as investors see a digital, download-able future for home movie viewing. With on demand, DVR, and downloading, the video store may become obsolete. Blockbuster also has to compete with Netflix in the short term, as the mail-only system is poaching subscribers from Blockbuster's network.

• Toshiba pioneered HD DVD technology, but throughout 2007 and into 2008 the major production companies, retailers, and rental outlets have publicly announced their support of Blu-ray discs. This does not bode well for Toshiba, which has spent millions marketing its HD DVD products.

• Music labels will lose more revenues, as CD sales continue to decline and digital music becomes the sole method of consumption for most listeners. Major labels EMI and Warner Music have had recent talks about a merger, but a challenger to the dominance of Apple's iTunes has yet to emerge.