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The High Barrier to Entry for New Brands in the Specialty AV Market

by Jerry Del Colliano March 23, 2021
Barrier To Entry

Barrier To Entry

1-CircuitCity-StoreA lot of ink has been invested in talking about the aging demographic of audiophiles, but little has been spent on how the established audio/video manufacturers dominate the product landscape. Take it from me, as I literally made my career from early 1996 to late 2019 selling ads to these companies: the barrier to entry for a new brand or even a new product category is sky-high in 2021. Living off of selling online ads exclusively was a one-dimensional business model that was quite profitable in the best of times (think around 2007), and depressing as hell towards the end (think more today). Many Zoloft-inspired moments came from seeing what “vulture capitalists” and private equity companies would do when they got their hands on an established AV company. Typically, they come in and buy a well-known, relationship-based specialty audio/video company, and two things happen without exception. First, they demand a 15 percent yearly return on the company’s yearly revenue no matter what, regardless of the price to be paid relating to the goodwill of the company. Finance people have no soul to be polite. They don’t care about long-standing loyal employees, meaningful future products, and they especially look to media budgets to decimate. Secondly, finance gurus don’t have a lot of patience. They want to pull the trigger on the resale of the company in no more than five years. That is their method across all types of businesses and industries. These MBA blowhards are the types of geniuses who make enthusiastically disastrous decisions like the one that the suits at Circuit City did when they decided to fire the relatively small number of high-performing commissioned salespeople, thus forcing the entire national chain into an irrecoverable Chapter 7 death spiral. That act of ignorance cost the U.S. economy 32,000 jobs back in the last recession, and killed off an excellent national retail pipeline for AV gear, which was ultimately replaced with transactional, non-sales-oriented venues like Amazon, Costco, Wal-Mart and Target. Bravo, gentlemen. 

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It isn’t that there aren’t any new companies thriving in today’s specialty audio/video market. Schitt Audio comes to mind as a playful, value-oriented audiophile brand that throws caution to the wind, and delivers products that enthusiasts eat up. While not a new company, one that got new religion through the leadership of an ex-Myer-Emco (a former retailer in Washington D.C. area) executive is SVS. This company has gone from a dorky, forum-user-only brand to one that has mainstream appeal for not just high-performance, excellent value subwoofers, but notably good speakers. Bababooey. A spin-off of Bowers & Wilkins of sorts, Vivid Audio, is coming on strong in the expensive audiophile market. Their very out-there physical form factors don’t appeal to everyone, but pack the speaker engineering genius of Laurence Dickie who designed the flagship Nautilus speaker for Bowers & Wilkins long ago.

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The problem is the aforementioned list of AV newcomers and success stories is far too short when compared to looking at the ones that have just disappeared. Runco, DVDo, Mitsubishi, Pioneer, Outlaw Audio, Theta, THIEL are just a few that jump into my mind, but this is far from a complete list. Rotel has recently been spun off from the former parent company of Bowers & Wilkins and Classe’, and is sadly somewhat irrelevant now. Wharfedale speakers got a shot in the arm from the leadership of Walter Schofield (who now runs Krell – a good comeback story, with a little of my handiwork involved), but fizzled out as soon as Walter wasn’t involved. THIEL Audio got a $9,000,000 multi-year injection of investment money, thus went the non-private-equity route for funding, yet still massively failed in today’s retro-facing audiophile market. If you look to the portfolio of Sound United (the company that has bought up a number of the best AV companies and turned them around), Classe’ could have been another victim of “not enough profit to keep the PE people happy” phenomenon. The current owner of the San Francisco 49ers recently bought Bowers & Wilkins as a true establishment speaker company, and then tried to use it to compete with Google and Amazon in the cheapie “smart speaker” market. You think I am kidding, right? No, I am not. Sound United in 2020 picked up B&W for pennies on the dollar, thus reuniting Bowers & Wilkins with Classe’. Under Wu’s team, ad budgets were slashed to close to zero. Engineers were fired en masse in the U.K., while executives on both sides of the pond were encouraged to retire (reportedly without any equity, ironically from the sale of the company that owned B&W, formerly named Equity International). AudioQuest bought GoldenEar Technologies from speaker marketing guru Sandy Gross three days before I sold my last portfolio of online AV publications in December of 2019. I don’t think the brain trust at AudioQuest kept Sandy around for more than 90 days, despite his track record as the best speaker marketer not-named Dr. Bose (see Definitive Technology and Polk Audio for examples of past success in the speaker space). Cut, cut, cut – they did and the brand sadly isn’t the same today.

So, what if you wanted to start an AV company? How would you go about it in today’s market? If it is an old-school inspired audiophile company that makes analog devices, homemade speakers or tube electronics, the cost might not be that high. But those aren’t the products that mainstream consumers or successful dealers want/buy/sell. Imagine what it would take to make a receiver that competes with what Denon, Sony or Yamaha could sell at retail for $500 or $1,000? You’d need closer to $10,000,000 than $5,000,000 to get started, and how would said receiver be better? It likely could only be made on the same production lines as the Denon and Sony, but likely wouldn’t have as many features, because the big boys can squeeze the manufacturer to say “don’t build that for them.” I can think of one enthusiast AV brand that is basically gone today, a modest client of mine who got pinched in just that way by an unscrupulous online AV retailer that also sold a competing AV preamp. This other company, based in the Southeast, allegedly put the pinch on its competition in old-school Microsoft style, and they got their way by putting their competition out of business. Ironically, the bigger and more predatory online retailer has had its own laundry list of problems with their new AV preamp platform, which has caused the price to go up and up and up, so that when you compare to, say, a top-of-the-line Marantz, you can’t help but see the improved reliability, additional features, and superior value. Consumers aren’t dumb, and thus they spend wisely without too much loyalty to older brands.

6-Sony-MasterSeries-UHDTVCan you imagine how much money it would cost to be in the video display market? This barrier to entry would likely start in the billions of dollars. Sony looks to LG for OLED panels for its top-of-the-line Master Series displays. That’s Sony, I said! What Pioneer had with KURO was the darling of the video reviewer community back in the days of plasma. And they went right out of the video market forever. Vizio has made video a good commodity, with little profit margin for a traditional retailer to work with. A few years ago, Sony smartly pivoted back to Ultra HDTVs, with some meaningful profit margin and better-than-average performance, which dealers and videophiles alike loved.

As a specialty AV enthusiast, you wield the power of voting with your economic ballot. You aren’t going to buy some jackass product that is lacking in HDMI functionality because of licensing costs, or one that is missing that key surround sound mode. We read publications like this to learn where both the performance and the value lie. That is part of the fun of the hobby. That is part of the journey.7-VividAudioSpeakers

There are some exciting companies coming up with innovative products. Brands like Nakymatone, Gray Sound and Stealth Acoustics are working in the invisible space where you have speakers and subs that perform with 20 to 20 range, but without anyone seeing them, which everybody (including wives) loves. Schitt Audio and Vivid Audio are good examples mentioned earlier. Tekton Design speakers are a recent success story from the domestically-built loudspeaker market that is somewhat unexpected, but simply undeniable in performance and sales by 2021 standards. There are likely more out there that I am not thinking of that deserve mention, which I hope to see in the comments below.

The challenge that I put before you is, when you spend your hard-earned audiophile and videophile dollar, think about who you are investing in. Are you getting the performance and value that you deserve? Are you going to have the resale (if any, especially in video) that you might expect from a blue-chip AV company? Will you get the support and service that a company like Audio Research has made their benchmark for decades? It all matters, people. It all matters.

 

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