The Wall Street Journal-20080129-TV Makers Aren-t Turned Off by Slump- Sony- Rivals Expect Growth Despite Threat of Recession

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TV Makers Aren't Turned Off by Slump; Sony, Rivals Expect Growth Despite Threat of Recession

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After weak holiday sales of everything from jewelry to clothing, U.S. retailers are bracing for one of the biggest slowdowns in consumer spending in years. But TV makers aren't worried. They're betting that flat-panel television sets have momentum on their side.

After seeing its U.S. electronics sales grow in the double-digits in the October-to-December period, Sony's Chief Executive Howard Stringer repeatedly told reporters at the World Economic Forum in Davos, Switzerland last week that he didn't see a reason to panic over a downturn. A big reason for the company's optimism is the surprising strength of one product: flat-panel digital televisions. The television business is one of Sony's biggest. And analysts say falling prices have made TVs enticing to consumers.

"The pricing point is now such that you can upgrade your main television and small sizes are doing well because consumers are also upgrading second and third televisions," says David Gibson, a Tokyo- based analyst with Macquarie Research.

At Best Buy Co., a 42-inch liquid-crystal-display TV by LG Electronics Co. dropped to less than $1,200 at the end of last year from about $3,000 a little more than a year and a half ago. Models by other manufacturers can be found at prices that are even lower.

According to market-research firm DisplaySearch, industrywide revenue from LCD televisions is expected to jump 27% to $82.7 billion world-wide this year while plasma-screen television sales are expected to grow 7% to $17 billion. In North America, which makes up about a third of global sales, it expects LCD-TV sales to increase by 26% to $27.1 billion. Plasma-TV sales are expected to decline slightly to $6.58 billion, but that is because of LCD's increasing popularity. DisplaySearch has kept its outlook unchanged despite increasing worries about a slowdown.

Looking for a new TV for his girlfriend at a San Francisco Best Buy yesterday, Bill Hightower, a 57-year-old pharmacist, said the countries recent economic woes hadn't trumped the desire to buy.

"It's time to upgrade. The price of TVs have come down so much . . . It's just time," says Mr. Hightower, who was looking at $700 26-inch flat-panel TVs.

Manufacturers are gearing up accordingly. Sharp Corp., which aims to sell at least 10 million LCD-TV sets in the next business year starting April, said this month that it planned to boost capacity at its LCD-panel factory by 50% by July, sooner than it had planned. Samsung Electronics Co., the world's top television maker by revenue, is doubling its capital spending in its LCD business this year to 3.7 trillion won ($3.9 billion).

But investors have a different view of the industry. Shares of many electronics companies have fallen sharply in the past several weeks amid concerns that their performance will be hit by the slump. The appreciation of the yen against the dollar has also exacerbated worries about Japanese companies in particular because it diminishes the value of overseas sales when converted to its home currency.

Sony's shares have fallen about 21% since the end of December while shares of Sharp and Matsushita Electric Industrial Co. have declined 11% and 14% in Tokyo, respectively. The problem, according to Macquarie's Mr. Gibson, is that investors remain suspicious of the companies' assurances of strong TV sales without concrete results to back them up. Meanwhile, electronics retailers like Best Buy and Circuit City Stores Inc. reported slower sales in December.

But analysts say the retailers are suffering, not because electronics products aren't selling, but because of tough competition in the retail industry. General merchandise retailers like Wal-Mart Stores Inc., its warehouse club Sam's Club and Costco Wholesale Corp. have a bigger presence than they have ever had in the flat-panel television market. What's more, they are offering aggressive promotions that are selling more TVs to compete with the likes of Best Buy. In one promotional event during the holidays, Wal-Mart offered a 50-inch plasma television by Vizio Inc. for less than $1,000. In order to persuade consumers who are tempted to hold off on making big purchases, retailers like Best Buy and Circuit City are offering no- interest financing deals for three years.

Kevin O'Connor, vice president of electronics for Wal-Mart, indicated that despite a slowing U.S. economy, when it comes to TV sales, its shoppers are still buying. "The flat-panel TV has actually made the TV a centerpiece again in the home -- it's now both decor and entertainment. If people are eating out less and staying home more, they see an affordable HDTV as a long-term asset that serves their future plans. Certainly that is what shoppers are telling us -- right now, it's not just for Super Bowl," Mr. O'Connor said in an email. Circuit City and Best Buy declined to be interviewed, and Costco couldn't be reached for comment.

Electronics executives say they believe the Super Bowl and this summer's Olympic Games in Beijing will keep selling televisions, too. As electronics makers have launched marketing campaigns and advertising that shows off their televisions' high-picture quality in conjunction with other digital devices, consumers are also buying products like digital cameras, camcorders and next-generation DVD players. Sony, for example, is expected to report strong quarterly earnings on Thursday, helped by increased sales of products that can be connected to its LCD televisions, such as its Cybershot digital cameras and the PlayStation 3 videogame console, which lets users watch high-definition Blu-ray movies.

Despite the optimism, executives say they are watching the economy closely because a prolonged downturn could eventually hurt television makers. "We're being cautious," Toshihiko Fujimoto, the head of Sharp's U.S. operations, said at the Consumer Electronics Show in Las Vegas this month.

Paul Gagnon, a senior analyst with DisplaySearch, says he believes consumers who want to spend less will still buy televisions though they "might choose to go a little smaller, or with a less feature- packed model to save a few dollars" because consumers' desire to upgrade their televisions is so strong.

Another motivator for consumers: In February 2009, broadcasters will shut off analog television signals and transmit only digital signals. This doesn't necessarily mean current analog tube televisions will no longer be usable. Consumers who subscribe to cable or satellite services won't be affected. Those who don't can still buy relatively inexpensive digital converters using government-issued vouchers. But it gives consumers an additional excuse and a sense of urgency to trade in their bulky sets for sleek flat-screen televisions that can receive digital signals.

Anthony Wilson, 48, bought two 20-inch TVs in August. He was looking for a TV for his mother's bedroom, because she was bedridden, and decided to buy a second one for his sister for the holidays. Mr. Wilson says the economy wasn't really a factor in his decision to buy the TVs, which cost about $400 each. Instead Mr. Wilson was more concerned about the switch to digital.

"Whatever they do next year with the changeover to digital, we're already done with it. We're ahead of the curve," says the San Francisco resident.