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Identifying Legitimately High Fidelity Loudspeakers: The Economics of Cost Cutting

by Paul Apollonio , August 24, 2011
Contributors:
Identifying Legitimately High Fidelity Loudspeakers

Identifying Legitimately High Fidelity Loudspeakers

Serious Sound vs Serious Profit

This article explores the economics behind the speaker business and some of the cost cutting approaches loudspeaker companies make to maximize profits while still keeping the products affordable to the consumer.  It is our goal to help the reader decide if loudspeakers from their favorite manufacturer are built for serious sound or serious profit.  Speaker building, especially during the design phase is, if nothing else, an effort in compromise for all but those most expensive systems.  A good designer must weigh every choice in light of its cost, as well as its relative contribution to the overall performance of the system.   It does so with a historical perspective, considering what has come before, and taking into account the changes which have occurred in the marketplace over the last three decades.  We will briefly delve into the shortcomings that arise resulting from these cost cutting techniques, especially when they are poorly applied. 

Is Your Favorite Loudspeaker Manufacturer Cutting Costs to Maximize Their Profits?

The short answer to that is a resounding YES.  For an engineer to create a loudspeaker without compromises, he or she would need an immense budget, and the resulting enclosure would likely require a great deal of real estate.  These requirements result in an extremely reduced potential customer base because of both how much the customer can pay, and how much space they can assign to the loudspeaker to do its job. Even high end manufacturers offer different models for different budgets in acknowledgment to this reality of the marketplace.  It is, after all, common sense. The small condo across from the strip mall costs less than the 5 bedroom home on the beach in Malibu, CA.  The Bugati Veyron with 1000 horsepower is going to cost more than the small Kia with a 150 horsepower engine.  The controversy comes when manufacturers either make foolish compromises, or take reasoned intelligent decisions that are required by their budget, and follow them up with ridiculous marketing campaigns. Such campaigns often suggest their budget systems sound just as good as the very expensive high end, well-engineered systems employing little-to-no compromise which sell for more than $10,000 per pair. There are at least three good ways to describe such claims:

  • Lying
  • Marketing
  • Hyperbole

Differentiating between these three is sometimes like trying to find the difference between six, and 1/2 dozen.  If you read or hear such claims, and do not view them with the cynicism they deserve, you may find yourself in the group of people WC Fields spoke about when he famously said, “It's morally wrong to allow a sucker to keep his money.”  Of course, the man was also known to say. “If you can't dazzle them with brilliance, baffle them with bull.” (as well as the more famous “Never give a sucker an even break.”)  Seems like WC Fields was the creator of the modern day snake oil school of selling.

The relationship between cost and price breaks down completely in the uber-high-end market where the biggest expense is in marketing as well as creating and maintaining a story which contains both features and benefits.  Most folks with a great deal of cash are not audio experts.  (Sorry all you wanna-be audio engineers, if you want to make a million dollars in audio, the best way is to start with $2 million and cut your losses).  So, how do you get the consumers' money?  A trip to Vegas to the CES high end displays in the Venetian is a great lesson in this art.  Here is a world-wide collection of people who have made marketing BS into a full time art-form (not everyone there, mind you).  For every serious person here with a reasoned rational sales pitch, there are perhaps 99 counterparts who are basically snake oil salesmen.  This is not the same as claiming 99% of the efforts are poor engineering efforts.  That is another issue.  It is to say often the stories used in selling have little or anything to do with the physics or actual performance of the speakers themselves.

EgglestonesOne time during lunch with a client during a CES show, he asked me if I heard the $100,000 loudspeaker by company “x”.  I told him I had, and he asked me almost shyly: "So, what did you think?"  (This speaker had used compound loading on top of compound loading, so where you saw 1 loudspeaker, there were another 3 behind it).  "I thought the smaller cheaper one sounded a lot better", was my reply.  The client perked up and chimed in with “So did I!”, sounding as if I had just told him the Emperor had no clothes. It was now apparently "safe" for us to talk. People have the expectation that if a speaker is bigger and more expensive, it is also better.  Not so fast... it is not always so.  In the ultra-high-end market, the relationship between cost and performance is not so obvious or linear.  This does not mean you cannot compete with a $100,000 speaker with a $10,000 one.  And it also does not mean a $250 speaker has a chance against the $100,000 or $10,000 speaker unless the engineer who put together the expensive unit really did an incredibly poor job of designing.

Despite the fact that this is common knowledge among engineers who practice their art in this business; and despite the fact it may seem like common sense to most of our readers, there does and will continue to exist in the online audiophile community outrageous claims. Claims that you cannot buy a better speaker at any cost at price points where budget is making decisions on what parts you can afford to put in the box.  Those who have “drunk the Kool-Aid”, especially when their budgets won't allow for champagne, are usually the biggest followers of such false profits.  The only real profits, are the ones the manufacturers deposit from the sale of a high margin product. (The holy grail of retail).

Loudspeakers have some of the biggest profit margins in consumer A/V. Most of the big brands operate on a 40 to 60 point margin, meaning their speakers retail for $1000/pair, and sell at $750/pair (street price) while dealer cost on them is usually around $400 to $600/pair.  For custom cabinet finishes, the margins are higher still.  (Just like the options on that new car, when you go premium, the profitability to the dealership goes up.)  Don't assume that simply buying an Internet direct brand lowers the margins by "cutting out the middle man".  This isn't always the case, which can be seen once you open up and explore some of these products and scratch your head in wonder at how they can command such a high asking price. Don't get us wrong, there is nothing wrong with a manufacturer making profit.  The problem however is when they make excessive profit off of amediocre product and use pseudo science to justify it.

We broach this topic in: Revealing the Flaws in a Loudspeaker Demo and Double Blind Test

Budgeting Your A/V System

So, how do we educate ourselves as consumers so that we may spend our budgeted dollars wisely?  At what point do we look inside the box for answers?  How much could we actually tell if we could look? Should we trust the manufacturer's advertising?  Does the advertising even have a basis in reality?  What about those online reviews from magazines that never have any criticism of the products they review?  Should we trust them?  Maybe we can only trust our own ears?  Can we be fooled by what we hear if we are not trained as critical listeners?  Those are all very good questions.

Well, fortunately for Audioholics readers, you are not out in the cold all alone.  We call it like we see it.  Sometimes that gives us negative backlash from readers who are avid fans of products we criticize, and even more often, it costs us advertising dollars, but we remember who it is we serve first... YOU our readers, without whom we do not have a mission.

All education comes at a price, however.  It requires us as consumers to learn about the physics behind the reproduction of sound, and know what can and will influence our evaluations in the listening space, the program materials, and the other components used in the reproduction chain. 

Unless you have made some monumental screw-up in the acquisition of the components for your AV system, the weakest link is the loudspeaker.  (The room is usually running a close second).  The hard reality is that speakers have the most difficult job of any components in the reproduction chain. They are, even in state of the art components, an order of magnitude worse when it comes to producing undistorted sound than even an inexpensive receiver.  Of course, that is just the point, neither the receiver nor the source device  have the job of making sound.  What they do is store or amplify one electronic signal and end up as another modified but still purely electronic signal.  (one can argue here that the media is optical, but the bits, when processed, are still an electronic signal.)  Sound, of course, requires us to move air in a way analogous (yes, it is an analog process) to the way in which the air was stimulated by the original artist, or more precisely, captured by the microphone (which has the second hardest job in audio).  So why, if it is the loudspeaker which has the hardest job in the reproduction chain, it is not getting more attention and more of the consumer's budget?  That is, in large part, a result of not only the changing marketplace, but the way we as consumers have been educated (or misled) in how to go about evaluating a loudspeaker. 

As a rule of thumb, while most speakers reveal frequency and polar issues at any level, the may hide their output limitation issues unless driven very hard, sometimes requiring they be abused for long periods of time before showing the signs of deteriorating performance.  That is something consumers rarely (if ever) do in practice, for obvious reasons.  The result of which is they go home with products that will sound very different in the home than they did in the store.  What doesn't help is most review magazines only measure loudspeakers at very low drive levels, so you never get to empirically see their misbehavior.

For more information about this topic, we suggest reading:  Audio Measurements: The Useful vs the Bogus

How one's budget is divided among components has always been a pet peeve of mine.  Consumers are quickly willing to pay nearly double for twice as many watts from a power amp (the price per watt calculation), yet ask them for 50% more on the price of the loudspeaker when you increase its sensitivity or power handling by 3db and you are likely to get looked at cross-eyed and with great suspicion (unless the product looks quite different from the outside!)  Despite this marketing reality, doubling your efficiency while increasing available excursion from your loudspeaker is a far more effective way to double your output than is doubling your electrical power from (for example) 400 to 800 watts.  Simply put, the loudspeaker may convert a smaller and smaller percentage of power into sound, and a greater percentage into heat as power input levels rise.  In order to get  higher efficiency, we  will require a larger box, better drivers, a better crossover, and all of these improvements cost more than their discount budget cousins.

The Costs of Production

So back to our 50 point retail “markup” speaker. (Remember too, the retailer is not buying the speaker for what it cost the manufacturer to produce it.  The manufacturer also has their mark-up to maintain a profitable business. Since it is often the case that the manufacturer has a relatively small percentage of the retail cost in driver parts invested in the speaker system, they must make critical decisions on what aspects of parts matter most to produce the best sounding speaker for the budget that they have to keep themselves within.

Assuming the manufacturer works off a 50% margin, (meaning it sells at 1.5 times his cost) and produces a speaker for $150.  From that, he has to take his profit, ($50) his cost of production, which includes labor (employees), overhead (rent), taxes (God help us all), the box it ships in, the warranty card, the returns allowance, insurance, and let us not forget that marketing budget which can go anywhere from 0% to 90% of the cost of the speaker system.  If the manufacturer sends it through distribution (meaning the product sells in a brick and mortar store), that adds another 50% to the final cost paid by the consumer.  By the time we have built a finished $600 retail box, the amount of money left over for actual components (drivers, crossover, etc) may be no more than 10% of the retail price.  In other words, that $600 retail speaker likely has no more than $60 in speaker components in the box.  (Even less, if the speaker is self-powered).  If your box is powered, the amp is often more expensive than your speakers by a factor of two or more. 

Most vendors have a product line which may include both profitable and profit losing items, and often they are unaware they are losing money on some of the product line.  What they do know, is that for every “X” number of dollars, the product costs them, after taking into account all their overhead and expenses, and leaving room for profit, they will calculate the retail price based on a multiplication factor.  (If the speaker costs me $100, it must sell for $499 retail in order for everyone to make a buck!)  It was my comprehension of this process combined with a lack of disposable income as a young college student which led me to the inevitable conclusion that I ought to build my own speakers, and thus began my career in audio as an amateur loudspeaker builder in the 1970's.

Since the average guy has no idea what compromises get made in the process of the creation of a loudspeaker system, we are left with the reality that what influences the purchase decision most is the image the buyer associates with the brand, and the perception of the consumer as it was influenced (by either advertising or what he has read on forums) prior to his trip to the store. 

Recently while getting a haircut, my barber proclaimed his new Bose speakers to be the greatest thing since slice bread (OK, I am paraphrasing here).  When I asked him why, he told me because you no longer have to put loudspeakers all over the room to get surround sound, because he gets it with the speakers included inside his new TV.  Some months ago I visited Tom Holman at the Verterbi School of engineering at USC.  Dr. Holman was using 14 speakers for surround, and was thinking of proposing 10 in the next surround standard.  After some discussion, he left me with the distinct impression he believed if you want it to sound like surround sound, the best way is to add another channel and another speaker (within reason of course).  Yet, here is my barber (local audiophile and scissors expert) who bought the Kool Aid the local salesman offered him (no offense to the good folks who make their money selling sugar mixed with a great deal of dye of course, but since the Jonestown suicides, it is my expression of choice).

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By Paul Apollonio

Recent Forum Posts:

fmw posts on July 26, 2013 11:23
Good article. I was confused by the margin calculations. In the retail business (of which I have been a part all my life) calculates margin or markup or gross profit as selling price - cost / selling price. Your calculation is selling price - cost / cost. We refer to the latter as mark on and I'm not aware of a single retailer that uses it. A 50% margin means the selling is price is twice the cost. A selling price of 1.5 times the cost is a 33% margin or gross profit. Is the audio industry different from all the others?
ruzveh posts on July 26, 2013 00:41
Consumers are fools

Yea consumers are fool, this is what most of the salesman and the companies think when they design a product or sell them in the market. I myself being a salesman has never thought like this and always respected consumers and their taste. Afterall it is the long term relationship of these consumers and the salesman. Being truthful is our moral job.

I agree with the author here and would like to request all that you should always audition speakers before you buy or before you hear those technical terms from the companies. This is where you will get the most out of your money. Please remember that most of the speakers reviews are utter bullshit and fully useless.

I am very unhappy the way speakers are tested and auditioned by the reviewers. They tend to use lots of jargon's and other stuffs which we are unaware of. I guess they must be paid to review by these companies.

I have seen 1000's of reviews across all sites and the trusted and reliable ones i guess are the ones which are reviewed by the users / owners themselves, so place like amazon becomes my primary search for the genuine review. Yea i know there are some fake reviews as well where someone must have posted to attract consumers to buy them. I dont like the fact that these people test such crappy music on their systems which most of us never tend to listen to them or might be listening hardly 0.1% of the time.

Please keep in mind that different speakers behave and sound differently with different music. If you hear piano, instrumental or classic you have a speaker which may not sound equally good with rock, pop, heavy metal, etc.

So why dont these reviewers play and audition those tracks which we hear the most and tell us that how much is the dept of those music. This is a better way for me to recognize a sound from a speaker, isnt it?

Reviewers only test the movies and say its awesome, now what the hell will i know what is awesome? Please mention which scene you played and what awesome you liked about it?

We also want reviewers to open the speakers and find the black magic within like how computer components are tested. Please learn from them or simply admitted that you are not educated.

Too much i have spoken and written about it. Thankyou and sorry if you felt bad
MinusTheBear posts on September 08, 2011 12:42
SoundStage recently released an article on high performance speakers. Out of the best reasonably priced speakers they left out Infinity and Ascend Acoustics. The list is mostly advertiser driven with the exception of Revel, Def Tech and a few others. Some nice speakers mentioned none the less.

http://www.soundstage.com/index.php?option=com_content&view=article&id=295:high-performance-loudspeakers-the-leaders&catid=62:monthly-column&Itemid=3
mtrycrafts posts on August 29, 2011 18:14
krabapple, post: 827994
Please excuse the diversion, but this seems a fine place to ask…are the specific criteria defining a ‘THX-style speaker’ available anywhere to the public? THX's own site was opaque on this, at least to my searching.

Most likely not as they guard their specs like a secret which it is and should be as they license companies who want to get certification, but you know this.
Perhaps, there is a leak someplace.
GO-NAD! posts on August 29, 2011 18:10
TLS Guy, post: 827943
Only if you take a micro view, not if you take a macro view.

The fact is that due to globalization and corporate acquisitions, excellence is getting to be a rarer and rarer commodity.

Excellence is speakers is one small part caught up in the whirl wind, created by idiot corporate bosses, short sighted government policies, bankers and hedge fund types with criminal ethics.

If we return to speakers, lets take Rolla Celestion. They produced really fine speakers, from a program of innovative research. They pioneered laser interferometry and pushed the science of cone design forward. Speakers from that body of research still fetch high prices on Audiogon and eBay, and with good reason.

So they got acquired by Goldmark industries out of Hong Kong. Now nothing but absolute junk is produced. This outfit also bought KEF. Recent offerings from KEF that I have auditioned, have been way less than stellar.

All this has accelerated the race to the bottom, and made the search for excellence a longer tougher road.

What if Billy Woodman retires and sells ATC? The the worlds finest mid range driver is threatened.

If the Scandinavian driver manufacturers succumb to the Far Eastern onslaught we are in dire straights. If they acquire the likes of B & W also we are really sunk.

Credit is flowing in the Far East. As you will see from some of my links, European credit markets are now frozen.

We have allowed a potentially disastrous situation to develop, and the loudspeaker business and pursuit of excellence is just one of many set backs caught up in this downward spiral.

This is all made worse by the fact that is no clear picture of where this will all lead. What is worse is that anybody with an ounce of intellectual honesty, has not got a clue of what to do about it.

I certainly see your point and I'll accept that it's kinda relevant. However, the title of the article is Identifying Legitimately High Fidelity Loudspeakers, not Identifying The Mass Of Crappy Loudspeakers Due To Globalization/Offshoring of Manufacturing. It also isn't a primer on micro- or macro- economics. In other words, the article is meant to help readers judge the quality of a speaker according to the quality of the components and assembly, as well as the soundness of the design. If a high quality loudspeaker happens to be manufactured in China or on Mars, that quality will speak for itself.

Doc, you know more about loudspeakers than I ever will. I don't know if any of the loudspeakers manufactured in China can be considered “high fidelity”. Considering the large number of models built there, I have a hard time believing that there are none.

I think it's all about judging a loudspeaker on its on merits, not where it came from. As for the economics aspect, it may be related to the topic - but only on the fringes.
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