Industry Profiles: Household Audio and Video Equipment and Audio Recordings

Overview

In the early 2000s, U.S. manufacturers of household audio and video equipment reported sales of $7.6 billion. This was slightly higher than sales during the 1990s, which averaged about $6.6 billion in the first half of the decade and $7.2 billion in the latter half of the decade. U.S. companies focused largely on producing audio speakers and advanced technology televisions. Virtually all other consumer electronic components sold in the United States were manufactured abroad or manufactured in the United States by foreign-owned companies. Although shipment values of audio and video equipment have increased steadily since 1990, such is not true of TVs, which declined from $5.1 billion in 1995 to approximately $4 billion in the late 1990s and early 2000s. Driving sales are popular consumer electronic product categories like high-definition television (HDTV) sets, digital versatile disk (DVD) players, home theater systems, and television/VCR combinations.

Approximately 271 companies manufactured household audio and video equipment in the United States in the early 2000s, down from a peak of more than 350 companies in the early 1990s. The decline was due in large part to intense foreign competition, primarily from Japan and South Korea, which forced many U.S. manufacturers to abandon consumer electronics altogether.

Meanwhile, U.S. producers of pre-recorded records, compact disks (CDs), and cassettes posted revenues of $2.9 billion in 2000, up from $2.6 billion in 1999. According to the Recording Industry Association of America (RIAA), in 2000 the industry sold most of its product via record stores (42 percent), other types of stores (41 percent), music clubs (eight percent), and the Internet (three percent). While sales via the Internet have been rising since the late 1990s, sales via music clubs have steadily declined from a 15 percent level in 1994. Though five major companies dominate the audio recording industry, the nature of the music business has always guaranteed a place for the small record company attuned to new forms of popular music.

History of the Industry

The household audio and video equipment industry had its origins in the late nineteenth century. Thomas Edison developed the phonograph using wax cylinders in 1877 and Guglielmo Marconi created a wireless transmission system in 1895 that was used for radio broadcasts. A few years after Thomas Edison invented the phonograph, Emile Berliner developed the disk format of recording. By the beginning of the twentieth century, the disk format replaced the wax cylinder as the phonograph record format. Another important early innovation was Lee DeForest's vacuum tube, developed in 1906, an invention that allowed for the amplification of electronic signals.

The 1920s were important years of research and commercialization for the industry. Developments included the first commercial radio broadcast in 1922, the Western Electric Company's patents for electrical sound recording and the replacement in radios of loudspeakers for headphones in 1924, the introduction of the AC radio in 1926, Philo Farnsworth's television patents, the introduction of automobile radios in 1927, and the first experimental television station permits issued by the government in 1928.

The industry enjoyed rapid growth in the 1920s and 1930s. During that period, more than 100 million radios were sold in the United States. The Federal Communications Commission (FCC) was established in the United States in 1934 to regulate broadcasting. The FCC authorized FM radio and television broadcasting in 1941, but these developments were forestalled by the country's entry into World War II. By the end of World War II, there were nine commercial television stations, 46 commercial FM stations, and 943 AM stations in the United States.

The late 1940s saw the industry return to its pre-war patterns of rapid growth and innovation. In 1947, the first magnetic tape recorders were marketed. Bell Telephone Laboratories demonstrated the first transistor that same year. The transistor marked the birth of solid-state electronic components, commercialized in 1954 with the mass marketing of the first "pocket radio." Home audio hobbyists who put together their own systems revealed that the capacity for fidelity of sound- reproducing equipment far exceeded the fidelity of existing recordings. This led to the introduction of 45 rpm records and 33 rpm long-playing records in 1948. These records were the first mass-produced "hi-fi" recordings. Other important developments in these years included color television broadcasting in 1954, videotape recording for television stations in 1956, and stereophonic audio systems in 1958.

Sales of color televisions surged during the mid-1960s. The first solid-state color television sets were marketed in 1967. By the mid-1970s, solid-state color sets dominated the market. The first color videocassette recorders for household use were marketed in 1975 and sales increased rapidly after the early 1980s. The 1980s saw the introduction and rapid diffusion of digital technologies in household audio and video equipment. The industry developed compact disc and accommodating audio systems, first mass-marketed in 1983, which quickly replaced phonograph systems.

Significant Events Affecting the Industry

The advent of digital music formats has been significant. In the mid to late 1990s, the most significant innovations in audio formats included digital audio tape recorders (DATs), digital compact cassettes (DCCs), and mini-discs (MDs). These formats offered the same sound quality of conventional CDs but also provided buyers with the additional option of recording. In addition to being able to transfer music directly onto recordable CDs (CD-R), by the early 2000s, consumers were buying computer hard drives, also known as digital music servers, for the sole purpose of storing music they had downloaded from the Internet (in formats like MP3) or transferred from their CD collections. Additionally, CD recorders and portable Internet audio players were increasing in popularity.

The digital footprint also made its mark in the video segment, as digital video recorders and video recorders with hard drives (HDD) came onto the scene. Much like VCRs, these devices are capable of recording television programs for viewing at a later time. However, they do so in digital formats and have greater storage capacity than analog cassettes.

U.S. television stations began broadcasting high-definition television (HDTV) shows in 1998. HDTV offers the picture quality of a 35-millimeter photograph combined with the sound quality of a compact disc. In contrast to conventional analog television with its 525 horizontal lines, HDTV has 1,080 horizontal lines, providing much keener images and detail. Led by Dolby Laboratories and Zenith Electronics, the industry developed HDTV standards and manufacturers began selling HDTV sets in 1998. High-definition VCRs followed, along with HDTV direct broadcast satellite dishes. By the early 2000s, about 10 percent of U.S. television stations were broadcasting digital signals. However, approximately 60 percent of the nation's homes were capable of receiving digital broadcasts. Many of the leading networks, including CBS, ABC, and PBS, were broadcasting varying percentages of their programming in HDTV format. Other networks, like Fox, were slower to follow suit. The increase in digital TV (DTV) broadcasts has brought a steep increase in sales of digital TV sets. DTV sales from manufacturers to retailers increased by a factor of about 400 percent from 1999 to 2000, according to the Consumer Electronics Association (CEA).

In the late 1990s, the digital video disk or the digital versatile disk (DVD) emerged as the successor of the CD, CD-ROM, and laser video disk. Pioneering manufacturers Matsushita, Sony, and others hailed it as the next revolutionary consumer electronics product. They anticipated robust sales of the DVD player because they hoped it would eventually replace the VCR. With a 4.7 gigabyte capacity, the DVD can store an entire movie in stereo on a five-inch disk that allows users to instantaneously fast-forward and rewind, just like the audio CD player. Furthermore, manufacturers designed their DVD players to be backwards compatible; that is, to recognize older laser disk formats such as the audio CD and the CD-ROM.

By 2000, DVD Audio (DVD-A) and Super Audio CD (SACD) players were being sold. These devices used DVDs for audio instead of video. They improved upon the sound quality and storage capacity of the standard compact disc introduced in the 1980s in a number of ways. A principal advantage was the ability to offer multi-channel sound. Recordable DVD players also were being marketed by the early 2000s, making DVD an even stronger alternative to the VCR. Additionally, DVD players were being sold along with popular home theater packages, and in combination units that included a TV, VCR, or both. Using industry data, including figures from the Consumers Electronics Association, the DVD Entertainment Group revealed that consumer sales of DVDs reached 16.7 million units in 2001, nearly double the sales rate achieved in 2000. Additionally, the association indicated that about 25 percent of U.S. homes had a DVD player, representing an unprecedented level of market penetration among consumer electronic products.

Key Competitors

The leading makers of household audio and video equipment in the United States have been subsidiaries of foreign-owned companies. Leading the pack in the early 2000s was Matsushita Electric Corporation of America, a subsidiary of Japan's Matsushita Electric Industrial Company, Ltd. The parent company posted 2001 sales of $61.1 billion in 2001. Matsushita has 23 manufacturing sites in the United States and is home to such well-known brands as Panasonic, JVC, Quasar, and Technics. Behind Matsushita was Sony Corporation, which attributed approximately 70 percent of its 2001 revenues ($58.5 billion) to consumer electronic devices like stereo systems, television sets, and VCRs. Netherlands-based Philips Electronic, N.V. posted sales of $28.8 billion in 2001. The company marketed products to U.S. residents through its subsidiary, Philips Electronics North America Corporation.

In the early 2000s, the industry's five leading audio recording producers included world leader Universal Music Group, Sony Music Entertainment, Inc., and BMG Entertainment. Controlling nearly a third of the U.S. Market, Universal owned 15 record labels including Motown and Interscope. The firm posted 2001 sales of $5.8 billion. A subsidiary of consumer electronics powerhouse Sony Corporation, Sony Music Entertainment, Inc. was positioned as the world's second-largest audio recording company. The company owned a number of leading labels including Columbia and Epic. Third-place Warner Music, a division of AOL Time Warner, Inc., remained the only major U.S. audio recording manufacturer in the early 2000s. Warner controlled some of the most profitable labels, including Atlantic, Elektra, Warner Brothers, and Reprise, and had sales of $3.9 billion in 2001.

Industry Projections

According to estimates from the Consumer Electronics Association (CEA), manufacturer-to-dealer sales in the United States hit a record $93.2 billion in 2001. This figure was projected to grow in 2002, setting another industry record at $95.7 billion. Although these figures include more than just household audio and video equipment, they represent the overall strength of the industry. Audio and video equipment account for a significant share of the industry's sales. This was especially true of video, the industry's leading sales category. According to the CEA, DVD players and digital television sales were among key items fueling the growth of home video equipment in the early 2000s. All video categories, with the exception of analog televisions but including VCRs (which were becoming very inexpensive to buy), were achieving growth. Digital TV products alone were expected to generate more than $8 billion in sales in 2002. On the home audio front, the CEA revealed that sales of both components and systems accounted for $3.7 billion in sales in 2000, an increase of more than six percent over 1999 levels. In this category, home theater systems were an important growth driver. Sales of "home-theater-in-a-box" systems, which include all of the necessary components and speakers in one convenient package, achieved growth of more than 130 percent in 2001 and were expected to increase almost 25 percent in 2002, reaching sales of $945 million.

In 2000, the total retail value of the sound recording industry's products fell slightly (almost three percent) along with the number of recording units sold (about nine percent). The total number of audio recordings fell from 1.16 billion in 1999 to 1.07 billion in 2000. According to the Recording Industry Association of America, several key trends were evident in the early 2000s. Among these was the continuing and significant decrease in the number of audiocassettes and vinyl records being sold as the compact disc format continued to represent the preferred format for most recordings. The demand for singles also decreased markedly in the year 2000 by a factor of 50 percent. In response to consumer shopping trends, in the early 2000s, sales via the Internet and non-record stores were on the rise while sales from dedicated record stores and music clubs were declining. The rock music category was the most popular, followed by rap/hip hop, which surpassed country as the second most popular category in 2000.

Global Presence

The United States is the leading importer of home audio and video equipment. The value of imports increased significantly from approximately $20.0 billion in 1997 to about $30 billion in 2000, while exports remained relatively flat. Consequently, the nation's trade deficit increased, growing from $15.5 billion in 1997 to $25.6 billion in 2000. The weakness of the U.S. industry was also reflected in the fact that the top U.S.-based producers in 2001 were subsidiaries of foreign firms. Even Zenith, once the largest U.S.-based producer that was not a subsidiary of a foreign firm, became linked to a foreign company (LG Group of Korea) in the mid-1990s. With its high labor costs, U.S. manufacturers produce very few VCRs, televisions, tape and CD players and radios relative to the Asian giants based in Japan and Korea. Japan was the world's leading producer and exporter of household audio and video equipment in the 1990s and early 2000s. However, since the 1980s, Japan's dominance has been challenged by rapidly expanding production in South Korea, China, Singapore, Hong Kong, Malaysia, and Taiwan.

Worldwide retail audio recording sales totaled $37 billion in 2000, according to the London-based IFPI. In terms of volume, the United States was the leader in compact disc sales, with 943 million units. In second place was Japan (279 million units), followed by Germany (205 million units). The United Kingdom led the way in per capita sales of audio recordings, with each person purchasing about 4.0 recordings per year. Denmark and the United States were close behind, averaging about 3.8 recordings per person. According to the IFPI, local artists account for a growing percentage of worldwide sales in their respective regions, representing almost 70 percent of sales in 2000.

Employment in the Industry

The audio/video equipment industry employed 28,692 workers in 2000, including approximately 19,000 production workers. The sound recording industry, on the other hand, employed 27,053 workers, including 20,424 production workers. Production employees in the audio/video equipment industry earned about $12.36 an hour, while those in the sound recording industry earned $13.74 an hour. The workforce of both industries continued to decrease throughout the 1990s and into the early 2000s with the implementation of new manufacturing technology to automate the production process.

Sources for Further Study

annual survey of manufacturers. washington, dc: u.s. department of commerce, economics and statistics administration, u.s. census bureau, february 2002.

current industrial reports. washington, dc: u.s. department of commerce, economics and statistics administration, u.s. census bureau, august 2001.

digital america 2001, the u.s. consumer electronics industry today. arlington, va: consumer electronics association, 2001. available at http://www.ce.org.

"dvd software purchases increased 2.4 times to $4.6 billion, putting dvd sales ahead of vhs for the first time." las vegas: dvd entertainment group, 8 january 2001. available at http://www.recordingmedia.org.

"industry information." london: ifpi, 9 april 2002. available at http://www.ifpi.org.

"industry information." washington, dc: the recording industry association of america, 9 april 2002. available at http://www.riaa.com.

remich, norman c., jr. "gunning for global gains: world smarts coupled with new-product initiatives are needed to put a plus sign next to each industry segment for 1998." appliance manufacturer, january 1998.

———. "3 record breakers for 1996." appliance manufacturer, january 1997.

u.s. industry and trade outlook 1998. washington, dc: mcgraw hill and department of commerce, 1998.