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Consumer electronics sector faces worldwide slowdown

Market research firm predicts 2006 to be a ‘transitional year’ for consumer electronics industry

The introduction of next-generation versions of core products and an overall slowdown in consumer demand will characterise 2006 as a transitional year for the consumer electronics industry, according to a new report published by market research firm iSuppli.

The company predicted that after three consecutive years of double-digit percentage growth, consumer electronics manufacturing revenues and unit shipments would increase by 6.7% and 8.7% respectively in 2006.

Furthermore, annual global growth rates should continue to fall until at least 2010.

iSuppli forecast consumer electronics system factory revenues to reach US$311.6 billion in 2006, up from US$292 billion in 2005. However, that figure will increase to only US$349.6 billion by 2010.

This represents a major slowdown in the industry’s compound annual growth rate (CAGR) to just 2.9% for the period from 2006 to 2010, compared to impressive 9% growth from 2001 to 2005.

Higher interest rates, longer consumable replacement cycles, rising household penetration rates and challenges relating to digital rights management (DRM) issues are among the long-term trends contributing to the overall slowdown in growth, the company said.

Despite this, various product segments are expected to continue to achieve impressive growth rates, including MP3 players, digital televisions (DTVs) and DVD players.

“The segments most resistant to the slowdown are those most associated with ‘multiple ownership,’ i.e. products that consumers own more than one of,” said Chris Crotty, senior analyst of consumer electronics at iSuppli.

“Consumers are more likely to buy a second television or DVD player for the bedroom or perhaps a second MP3 player for their gym bag.”

Crotty claimed that the introduction of competing next-generation HD DVD and Blu-ray DVD formats and periphery gaming consoles would drive consumer interest in the category.

These new products have been the focus of a protracted and particularly bitter struggle between supporters of the rival standards, most notable Blu-ray proponent Sony, and HD-DVD chief Toshiba.

Some observers believe this dispute is causing a delay in the development of next-generation DVD peripheral devices that will not be resolved until a single standard dominates the market. However, Crotty took a more optimistic view of the issues at play.

“By the end of the year, manufacturers will launch dual-format players and holdout studios will announce support for both standards,” Crotty said.

DVD equipment is not the only product segment to experience the beginnings of a generational change in 2006, Crotty claimed.

Sony is scheduled to launch its long-awaited PlayStation 3 (PS3) gaming console in November, which will pitch the company against Microsoft and Nintendo with their Xbox 360 and Revolution platforms for dominance of the market.

Crotty claimed the result of all these new product introductions would be a jump in video-game console factory revenue and units in 2006. He cited official research from iSupply that estimated video-game console shipments to rise to 34.5 million units in 2006, up 30% from 26.5 million units in 2005.

Total sales revenue will rise to US$7.6 billion, up 51% from US$5 billion in 2005.

Crotty claimed that competition would not be limited to the DVD and video-game console markets. As shipment growth decelerates and revenues flatten in various product areas, competition is sure to intensify, he said.

“Unfortunately, the losses and consolidation already seen in the digital still camera market may be a sign of things to come for other segments,” he added.

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