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Flat profits for flat panel TVs
Big techs are rushing into the LCD and plasma TV markets but investors shouldn't get too excited.
January 9, 2004: 1:16 PM EST
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Tech companies have seen the future...and its name is the boob tube.

Of course, we're not talking about your old school cathode-ray tube televisions, but rather flat panel TVs that use liquid crystal display (LCD) or plasma technology.

Plasma and LCD flat panel TVs have been all the rage at the Consumer Electronics Show (CES) in Las Vegas this week as personal computer companies Hewlett-Packard, Dell and Gateway, and cell phone manufacturer Motorola have all entered the market, challenging traditional TV makers such as Sony, Matsushita (which makes the Panasonic brand), and Philips.

Price cuts good for consumers, not investors

That's great news for consumers since extra competition tends to translate to lower prices -- important for spurring adoption since a 30-inch high-definition LCD TV from Gateway costs $3,000 while a 42-inch high-definition plasma TV has a price tag of $4,500 (and those are among the cheapest options out there).

All this competition is not good news for investors however. Sales are likely to rise substantially this year for these products...but at what cost?

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"You're seeing a land grab attempt," said Bill Fearnley, Jr., an analyst with FTN Midwest Research. "As everybody rushes in, there will be incremental revenue gains but it remains to be seen what the gross profits will be."

To be sure, profit margins on consumer electronics devices like televisions are higher than the razor-thin profits for personal computers. But margins will likely thin a little now that there is more competition in this industry.

Plus, all these companies are chasing a market that is still quite small. According to a recent report by UBS global technology strategist Pip Coburn, plasma and LCD TV sales are expected to account for just 4 percent of total global TV shipments in 2003 and only 7 percent in 2004.

And since there are two competing standards for flat panel TVs, that will add to pricing pressures as well, said Jacob Kaldenbaugh, senior analyst with Harvest Equity Research, an independent research firm that focuses on digital media.

Kaldenbaugh also notes that the best tech investments tend to be in industries with little competition and proprietary technologies. Think Microsoft and its dominance of the operating system market or Intel and microprocessors. " I don't think flat panel TVs are an investable trend," said Kaldenbaugh.

Dude, Dell is pressuring margins

What's more, the presence of Dell (DELL: Research, Estimates) in the market could really spell trouble for competitors. Dell has made a habit of waiting for markets to emerge and then entering them with lower-priced products.

Since Dell has a relatively low-cost structure (it spends much less on research and development than competitors, for example, and has a direct-selling model) it can still make money when it cuts prices.

That's not the case for Hewlett-Packard (HPQ: Research, Estimates), which is barely eking out a profit in its PC business or for Gateway (GTW: Research, Estimates), which continues to lose money and warned on Monday that its fourth quarter sales would be lower than expected.

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In fact, an executive from LG Electronics, the Korean consumer electronic company that sells TVs under the Zenith brand, said during a presentation at CES Wednesday that the entrance of the PC makers has disrupted the economics of the TV market.

So expect prices for LCD and plasma TVs to keep falling as the buzz continues to increase. But eventually that means that some companies will find that it's not feasible to keep selling flat-panel TVs if it becomes just another commodity business like selling PCs.

"Everybody is rushing to TVs and suppliers, through natural competition will slim down a bit," said Fearnley. "Over time, companies will have to make the decision to stay in or get out."

And investors hoping that this hot new product could be a source of big profits for companies like Hewlett-Packard, Gateway and Motorola might want to think again.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to them.  Top of page

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