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Home > Press > CEA Publications > Digital America > Digital America 2006 > Audio > Changing Times
Industry Changes


The home audio industry is preparing itself for future change and adapting to current changes to turn around its declining fortunes. Already, component A/V receivers, home-theater-
in-a-box (HTiB) systems, and all-in-one compact stereo systems are connecting to the home network to reproduce music stored on a networked PC or streamed from Internet radio stations. Compact systems (also called shelf systems) incorporate an AM/FM tuner, amplification and a CD player in one or two small chassis packaged with a pair of speakers for tabletop placement. HTiBs, which are larger and generally more powerful, add surround-sound decoding and additional speakers to reproduce movie-theater soundtracks.

Other networked products reproduce music stored on a central, dedicated music server located in another room. Some of them also stream Internet radio stations through a broadband connection. In a hint of things to come, one company in 2005 shipped the world’s first networked clock/radio, which wakes consumers up by streaming an Internet radio station or a music file stored on a networked PC.


Other home products control connected MP3 players and reproduce the player’s music through high-fidelity amplifiers and speakers. Some HTiBs and compact systems “rip” CDs and transfer the songs to MP3 portables. And many components, HTiBs and compact stereos are now satellite-radio-ready, enabling them to reproduce satellite radio channels when connected to an optional palm-size satellite-radio antenna with embedded satellite-radio tuner.

Home’s Hang-ups
The changes, however, haven’t yet turned home audio sales around. In 2005, factory-level home audio sales, including tabletop radios, collapsed by 16 percent to $2.68 billion, CEA statistics show. The association forecast a six percent drop in 2006.

Factory-level portable audio sales, on the other hand, hit an all-time high. Sales rose 119 percent in 2005 to $5 billion, exceeding the previous record of $2.8 billion set in 1994. Sales were driven almost exclusively by sales of headphone stereos that use flash-memory or mini HDDs to store music in compressed-audio formats.

Portable music devices were responsible for all of the growth posted by the combined home/portable audio industries in 2005 and will be responsible for the combined industries’ projected growth in 2006, CEA statistics show. Combined factory-level sales rose 40 percent in 2005 to $7.68 billion and will rise a projected six percent in 2006.

Portable audio sales resumed their upward trajectory earlier in the decade only with the advent of MP3 and other compressed-music formats. Home audio sales, however, continued to languish.

What’s the Story?
Marketers cite the home audio industry’s maturity, rapidly declining prices and new home entertainment options, which have grown to include videogames, PCs, MP3 players, and hundreds of cable- and satellite-TV channels.

The evolution of the PC into a key music source in peoples’ homes also took a toll on sales of traditional home audio products. Consumers opted to rip CDs for mass storage and playback on their PCs, which they also used to stream music from thousands of Internet radio stations and to download music files (legally or otherwise) for storage on their PCs’ hard drives. In fact, marketers cite the growing use of music-laden PCs by the young as a primary reason for declining sales of compact stereo systems, which have been superseded by music-playing PCs in bedrooms and college dormitories.

Meanwhile, music began to play a different role in peoples’ lives at home. Home audio sales once were driven by enthusiasts who would intently sit in one spot listening to a refrigerator-size rack of components in a room set aside for serious music listening. Now, most people listen to music as background in the home while engaging in other activities, and serious music listening is more likely to be done in the car or while on-the-go outside the car and home.

A 2005 “audio consumption” study by CEA sums it up this way: “Audio’s evolutionary path is leading us away from the traditions of previous years. Everything from audio content to playback device to listening location is undergoing an abrupt alteration. The pace of change has made the business of audio challenging – both from the hardware and content perspective. Markets are obscure, opportunities vague, and potential unknown…All of a sudden, audio is not so straightforward.”

Other factors fostering the 2005 home-audio fall-off include dealers’ focus on promoting new flat-panel HDTVs at the expense of audio products and lowered retail visibility by A/V specialists who are focusing more on custom-installation.

To accommodate changing consumer demands, home-audio suppliers initially developed compact all-in-one stereo systems that can be placed in multiple rooms of the house. They also developed full-size audio components that serve as the hub of a home theater system to reproduce movie soundtracks in surround sound with life-like realism and impact. Suppliers also developed HTiB systems to eliminate the need to purchase multiple larger components and speakers separately, simplifying consumers’ purchase decision and expanding the market to a broader customer base.

To tap into consumers’ growing PC-based music libraries, home suppliers expanded their selection of home audio products that play back compressed-music files burned onto recordable data CDs. These products include compact stereo systems, HTiBs and component CD/DVD players. A growing selection of car CD players, headphone CD players and CD boomboxes also play back MP3-CDs.

Bump, then Slump
In 2004, the home audio industry’s efforts seemed to pay off. A factory-level sales gain of 13 percent interrupted three consecutive years of decline, but sales resumed their slump in 2005 with a 16 percent decline to $2.68 billion. With the 2005 slump, home audio sales stood 28 percent below their 2000 peak of $3.74 billion, CEA statistics show.

The rate of decline in 2006 will slow to a CEA-forecast six percent for multiple reasons, suppliers contend. One is the rapidly declining price of flat-panel HDTVs, which will free up consumers’ disposable consumer electronics dollars. Suppliers also expect retailers to refocus their sales efforts increasingly on audio components to make up for low-profit video sales.\

By 2007, suppliers hope new product features will help rekindle home audio growth. They foresee more components and systems that:

-Connect to wired or wireless networks to access music stored on any networked device located in any room of the house, whether the sources are multiple PCs in different bedrooms or a centralized hard-disk-drive (HDD) music server. In custom-installed distributed-audio systems, servers distribute music to speakers mounted in the walls or ceilings of various rooms.

-Connect to the Internet to stream Internet radio stations.

-Control increasingly popular satellite-radio tuners.

-And build bridges to portable audio devices by controlling and playing music stored on a connected MP3 player through a high-quality home stereo. Such products include “docking stations” that incorporate amplifier and speakers to reproduce music stored on a docked MP3 player.

 

The Substance of Style

Besides developing components and systems that accommodate new music sources, suppliers also are developing more products that erect fewer practical and aesthetic objections to adding a home theater to a household. More component A/V receivers and HTiBs, for example, feature virtual surround technologies, which deliver a convincing surround-sound experience through two speakers rather than the usual four to seven speakers. In some cases, one speaker does the work of five.

In 2006, the industry will continue to broaden its base with products that fit unobtrusively in a home’s décor to overcome the objections of a household’s female decision-makers. To that end, suppliers aggressively have marketed small, aesthetically pleasing compact music systems, HTiB systems and high-fidelity AM/FM table radios, which incorporate a tuner, speakers, an amplifier and sometimes a CD player in a single small chassis. Compact stereo systems are generally larger than tabletop radios but still compact, but like high-performance tabletop radios, they also combine most of the elements of a bulky hi-fi component-audio system into a single, less-intimidating purchase. A compact stereo’s speakers, however, are physically separate from the system’s main unit, which houses all of the electronics.

Many compact systems sport furniture-quality cosmetics to distance them from conventional-looking “black-box” systems. Some incorporate vertical-loading CD mechanisms or other visually striking design elements. Other types of outstanding decor-conscious designs include wall-hanging music systems that use flat components and speakers.

Makers of high-fidelity component speakers are trying to overcome the aesthetic objections of decor-conscious consumers. They’re trying to live down their 1970’s wide-necktie bigger-is-better image with new design techniques that enhance clarity, imaging and bass response while reducing a speaker’s dimensions. Their goal is to deliver big-speaker sound from a slim package that doesn’t visually dominate a room. New manufacturing techniques turn boxy speakers into eye-appealing statuesque pieces of art.

Speaker makers have unleashed a greater selection of high-performance flat speakers that cosmetically match flat-panel plasma and LCD TVs. Like the flat-panel displays that they’re meant to flank, the speakers can be hung on the wall or placed on tabletop and floor-standing pedestals on both sides of a flat-panel display.

Home Theater Impact
Although music reproduction is undergoing a technological renaissance in home and portable audio devices, home theater audio remains a key revenue producer for audio suppliers.

When connected to a TV or video projector, the right audio system transforms the home video experience into the ultimate home entertainment experience. A home theater simulates the sonic and visual impact of a state-of-the-art movie theater. It puts you in the middle of a busy street scene, envelopes you with the sounds of explosions and flying debris, and wraps you in the lush sounds of a tropical rainforest.

Once consumers experience home theater in a store, it doesn’t take much to convince them to bring it home. In fact, as of January 2006, 36 percent of all U.S. households owned a home theater system, up from 21 percent in January 2000, according to CEA consumer surveys.

Portable Audio Buzz
In recent years, however, compressed music has created more buzz than home theater in the audio industry and among consumers. Demand for compressed music is so strong that once-recalcitrant music companies finally have embraced the concept. In 2003, music companies aggressively expanded the number of authorized websites from which consumers download music files for a fee. By early 2006, more than 20 companies offered music downloads from the Web, including cellular carriers that offer downloads from the wireless web.

These downloads are wrapped in various copy-control technologies to prevent widespread unauthorized sharing of the downloaded files over the Internet. The files, however, can be burned to CD or transferred to portable headset stereos that store music in unskippable solid-state flash memory or on miniature HDDs.


2006 Product Trends
The modern audio industry wasn’t founded in the middle of the 20th century to reproduce music through lightweight stereo headphones or to serve as an adjunct to the TV. Its founders had one goal in mind: high-quality music reproduction in the home.

During the first decade of the 21st century, the industry is advancing its music-reproduction goals in ways that its founders could never have imagined. Those methods include the networking of previously unconnected home entertainment products with one another and with PCs, the expansion of MP3-type music compression to home audio devices, and the delivery of  digital audio via satellite and terrestrial AM and FM radio stations.

Here’s how these trends will develop in 2006.

Tapping into Home Networks
More hard-disc-drive (HDD) music jukeboxes, or servers, will turn up with wired Ethernet or wireless-Ethernet home-network technologies to distribute music throughout the house. Servers offer efficient storage of thousands of songs and near-instantaneous access to each song in a compact device that replaces a bulky CD megachanger, which delivers slower access to as many as 400 stored CDs.

 Some servers are designed for use with custom-installed distributed-audio systems, which distribute music throughout the house through in-wall and in-ceiling speakers. Other servers are sold with small “clients” that plug into existing audio systems in multiple rooms. The clients use wired or wireless Ethernet connections or other network technologies to select server-stored songs remotely and play them back through the connected audio system, in many cases allowing different audio systems in different rooms to stream different songs simultaneously.

Some music servers also store digital pictures for display on a connected TV. Several models available this year store DVD movies as well as music on their HDD servers.

In 2004, the first home-theater-in-a-box (HTiB) system turned up with a built-in networked music server, first using proprietary wired connections, then later offering a wireless option, to stream music throughout the house. In late 2005, one company began shipping the industry’s first compact stereo system with a built-in networked server to distribute music wirelessly to compact stereo systems in other rooms.

Building PC-Audio System Bridges
In 2006, consumers will find a greater selection of networked devices called “digital media adapters (DMAs)”. These bridge the divide between a home entertainment system on one side and a PC or HDD-equipped networked attached storage (NAS) device on the other. The digital adapters stream music from PC- or NAS-based music collections to high-quality stereo systems in other rooms. From the remote room, consumers select the stored songs that they want to hear or tune into Internet radio stations.

Some adapters simply connect existing stereo systems to the network, but other adapters feature a built-in amplifier, so all you have to do is add speakers, not an entire stereo system. Others adapters include amplifiers and speakers to offer a complete solution.

In 2006, a growing number of adapters and players were expected to access digital images and videos stored on a remote PC or NAS device at prices starting at less than $100 for a model without amplifier and speakers.

The product trends underscore “a fundamental industry shift” toward networked (Internet Protocol-enabled) consumer electronics products, a 2006 report by Strategy Analytics concludes. The research company found that seven percent of digital consumer electronics sold in the U.S. in 2005 was network-enabled, up from one percent in 2004. In 2010, the company expects U.S. households will own more than 330 million networked products.

Compressed-music Portables Dominate

For now, however, networks are taking a backseat in sales to compressed-music (MP3-type) headphone portables. In 2006, CEA projects factory-level sales to rise about 18 percent to another all-time high following 2005’s 228 percent gain to $4.23 billion. The category enjoyed double-digit percentage gains since the 1998 debut of the first headphone MP3 player in the U.S. By January 2006, 28 percent of all U.S. households used MP3 portables, up from eight percent in January 2003, CEA consumer surveys show.

These battery-powered portables, whose sales have been dominated by Apple’s iPod brand, use solid-state flash memory or miniature hard disk drives (HDDs) to store music for playback through lightweight headphones. Their sales have grown rapidly in recent years because flash memory and HDD prices have fallen, storage capacity has grown, and consumers have grown enamored of their newfound ability to store their entire music library on a pocket-size device, then pick out individual songs to play back by title, artist or genre.

Growth also has been driven by a major pick-up in consumer advertising and a proliferating number of authorized download services that make it easier to download songs legally on an a la carte basis. In 2005, worldwide music sales (CDs and other physical media combined with authorized music downloads and cellular-phone ringtones) were flat or down, but legal sales of downloaded music tripled to $1.1 billion as consumers downloaded 420 million songs worldwide, according to the London-based International Federation of the Phonographic Industry

Compressed-music portables were solely responsible for three consecutive years of factory-level portable-audio sales gains from 2003-2005. In fact, during this period, factory-level sales of “legacy” portable audio platforms (CD- and cassette-based headphone stereos and boomboxes) slid dramatically. In 2005, sales of legacy portables dropped 22 percent to $774 million. That decline, coupled with explosive MP3 player growth, led MP3 players to account for the majority of portable audio dollar volume for the second consecutive year in 2005. And it was a wide majority: 85 percent in 2005 compared to 57 percent in 2004, CEA statistics show.

MP3’s influence, meantime, is growing beyond headphone stereos. In 2006, consumers will enjoy the first boomboxes that store compressed music in flash memory, and a growing selection of cellular phones will double as MP3 players, storing and playing back compressed music transferred from a PC. Select phones will download music over a cellular network directly to embedded or removable flash memory.

Satellite Radio Beams
Like the selection of MP3 players, the selection of home and car satellite-radio tuners will grow substantially this year, as will the number of satellite-radio subscribers. The combined subscriber bases of XM Satellite Radio and Sirius Satellite Radio rose more than 109 percent in 2005 to exceed 9.23 million, up from only 1.56 million at the beginning of 2004. The services project combined subscriber-base growth in 2006 of around 63 percent to more than 15 million.

Although satellite radio debuted initially in car stereo systems back in 2001, satellite radio companies are dishing out an expanded assortment of products that let subscribers hear satellite programs at home, outdoors and in the car without paying for more than one subscription. (Separate satellite-radio subscription fees must otherwise be paid for multiple satellite tuners owned by a consumer.) By the end of 2005, one analyst estimated, about 25 percent of the installed base of satellite tuners were used in the home.

With more than 100 channels each, the two satellite services expose radio listeners to a wider variety of musical genres, sports and information programming than is currently offered by local AM and FM stations in a given geographic market. It’s like tuning into Internet radio without being stuck in front of a PC. And, because the services deliver the programs nationwide, you can hear them without interruption when you’re driving through multiple metropolitan areas.

AM, FM Stations Clean Up, Diversify
With satellite radio gaining traction, AM and FM stations have accelerated their conversion to digital HD Radio technology to deliver noise-free digital clarity. Digital FM stations have also stepped up their adoption of multicasting to deliver two or more digital programs simultaneously from their assigned frequency to better compete with the diversity of satellite and Internet radio. The additional programs are broadcast without commercials – at least for now.

Digital FM stations sound “statistically indistinguishable” from CDs, and digital AM stations sound as good or better than analog FM stations, according to iBiquity Digital, which developed the digital HD Radio format. The technology also virtually eliminates FM multipath distortion and the familiar static, hiss, pops and fades associated with analog radio.

In late 2005, major radio-station groups banded together to form the HD Digital Radio Alliance, which began this year to promote consumer adoption of digital radios and coordinate the rollout of digital FM multicasting. By the end of 2005, 624 radio stations were broadcasting digital signals alongside their analog signal, and 70 offered multicast channels. By early 2006, 264 stations clustered in 28 major markets were to begin multicasting.

During the next few years, major radio groups have committed to expanding the number of digital stations to 2,500.

Delivering Multi-channel Music
While digital radio eagerly eyes mass-market acceptance, the critically acclaimed DVD-Audio and Super Audio CD (SACD) music formats have settled into a comfortable niche.

For a select clientele, the multi-channel-music formats deliver a resolution and clarity that captures the subtlest nuances of a live performance. Even more compelling is the formats’ ability to deliver multiple music channels through a surround-sound speaker system to create a sense of realism lacking in two-channel recordings.

Some DVD-Video players play music discs in the DVD-Audio and SACD formats, qualifying them as so-called “universal” players. Some DVD-Video players, however, play only one multi-channel music format or the other.

In 2006, at least one authorized download service planned to offer multi-channel music downloads to PCs and to HDD music servers.

Designing For Changing Times
In 2006, the audio industry will maintain its on-going, base-broadening effort with the launch of its next generation of products designed to simplify purchase, set-up and operation, while fitting unobtrusively in a home’s décor.

In the drive for simplicity, suppliers have aggressively marketed small, aesthetically pleasing all-in-one compact stereo systems and home-theater-in-a-box (HTiB) systems. Compact stereo systems, often called mini and micro systems depending on their size, are compact devices that combine all of the elements of a bulkier hi-fi component system – AM/FM tuner, CD player, amplifier, speakers and sometimes a DVD player – into a single, less-intimidating purchase. They deliver everything you need to play back prerecorded music. In a nod to changing times, some include HDD music servers, satellite-radio compatibility, control of headphone MP3 players, and the ability to rip CDs and transfer their contents to a connected MP3 player.

HTiBs, usually larger than compact stereos, package all of the audio pieces needed to create a home theater surround-sound experience. That includes five or more speakers, surround-sound decoder, amplification, and more often than not, an AM/FM tuner. Today, most HTiBs also include a DVD-Video player, thus providing all of the components of a home theater system except for the TV.

To further simplify set-up, and to appeal to the décor-conscious, a growing number of HTiBs will feature wireless surround speakers in 2006. By wirelessly broadcasting surround-channel content to surround speakers, the systems eliminate the need to run speaker wires around a room.

A growing number of HTiBs will also use virtual surround technologies to eliminate the need for surround speakers, freeing up valuable living room space, reducing visual clutter, and delivering surround sound in rooms where surround speakers can’t be optimally placed. Virtual surround technologies use sophisticated digital signal processing and speaker-design techniques to deliver surround effects without the surround speakers. They’re like high-tech ventriloquists, “throwing” voices and other sounds to your left and right.

To simplify the set-up of component home A/V receivers, suppliers are eliminating multiple video-cable connections to a TV, automating the selection of volume levels for each speaker in a component-based home theater system, and automating the selection of equalization settings to counter the deleterious effects of a room’s acoustics on frequency response.

Music Everywhere
Also to maintain its viability, the home audio industry is developing products that reflect consumers’ changing music-listening habits. A long time ago, the core home audio customer was a music enthusiast whose hobby was assembling a refrigerator-sized stack of components in a room set aside for serious music listening. Today, music enthusiasts are listening to music in more than one room in a house, often as a backdrop to other activities – from housekeeping to working on spreadsheets on their home PCs.

As CEA said in its audio consumption report, “The image of the audiophile is changing. No longer can we paint this person against the backdrop of a high-end, two-channel sound system cached in a dedicated listening room. The audio experience has moved well beyond this nostalgic expression to embrace new formats and frontiers.”

The change accounts for the proliferation of small, high-performance, one-piece, tabletop radios and CD/radios, a broad selection of under-cabinet CD/radios for the kitchen, and compact stereo systems and HTiBs.

In another recognition of music listeners’ mobility at home, suppliers have networked their products to deliver music from a central source – such as a 400-disc CD/DVD changer or hard-disk-drive (HDD) audio server – to music systems located in multiple rooms in a house. In some cases, these products plug into wired Ethernet networks installed by home builders in new homes. In a growing number of cases, the rooms are connected via “no-new-wires” home-network technologies that use wireless-Ethernet technology or a home’s electrical wiring to distribute audio.

Custom Options
The popularity of custom-installed multi-room-audio systems also reflects the demand for music everywhere in a home. These systems are built around a central audio system that distributes music to in-wall and in-ceiling speakers throughout the house -- and, when outdoor speakers are included -- to the patio or pool. Using an in-wall control panel or remote in each room, you can turn on the sound system, select songs from the server, sit back and enjoy.