Home Theater Impact:

Home theater, however, continues to drive the majority of audio industry sales. 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, surrounds you with the sounds of explosions and flying debris, or 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 one home. In fact, as of January 2005, 33 percent of all U.S. households owned a home theater system, up from 21 percent in January 2000, according to CEA consumer surveys. In response to home theater’s popularity, many audio suppliers have diversified beyond audio products to offer all of the audio and video components of a home theater system.

2005 Product Trends 

The modern hi-fi industry, however, wasn’t founded in the middle of the 20th century as an adjunct to the TV. Its founders had one goal in mind: high-quality music reproduction. In the early 21st century, the industry is advancing its music-reproduction goal in ways that its founders never could have imagined. Those ways include: 

Tapping into Home Networks:
More hard-disc-drive (HDD) music jukeboxes, or servers, are turning up with wired (Ethernet) or wireless-Ethernet home-network technologies to distribute music throughout the house. The 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 up to 400 stored CDs.

Some servers are designed for use with expensive custom-installed distributed-audio systems, which distribute music throughout the house through in-wall and in-ceiling speakers. Other servers come with small “clients” that can be plugged into an existing audio system in any room to select and play the servers’ content remotely.

Some music servers also store digital pictures for display on a connected TV. At least one music server due in 2005 was expected to serve double-duty as a digital video recorder (DVR) whose recorded video also could be distributed to other rooms in a house.

In 2004, the first home-theater-in-a-box (HTiB) system turned up with built-in networked music server, although it used proprietary wired connections rather than Ethernet connections to stream music throughout the house. HTiBs, at a minimum, package all of the audio pieces needed to create a home theater surround sound experience.

In 2005, consumers can look forward to the industry’s first compact stereo system with a built-in networked server. 

Building PC-Audio System Bridges:

Also in 2005, consumers will find a greater selection of networked devices often called “digital media receivers,” which act as bridges between a PC and a home entertainment system. The bridges stream music from PC-based music collections to high-quality home stereo systems in other rooms. From the remote room, consumers select the PC-based music files they want to hear or tune into Internet radio stations.

Some bridges feature a built-in amplifier, so all you have to do is add speakers, not an entire stereo system. Others include the speakers.

In 2005, a growing number of bridges were expected to access digital images and videos stored on a remote PC. Similarly, HTiBs from at least two companies in 2005 were expected to feature network connections to access music, digital images and videos stored on a networked PC.

Expanding Sales of Compressed-Music Portables:

Factory-level sales of compressed-music (MP3-type) headphone portables rose in 2004 to an all-time high of $1.29 billion, up an astounding 204 percent, according to CEA estimates. These battery-powered portables use solid-state flash memory or HDDs to store music for playback through lightweight headphones.

Their sales have grown rapidly in recent years because prices of flash memory and HDDs have fallen, storage capacity has grown, and the number of suppliers has proliferated. Growth, however, went into hyperdrive during the past two years because of a major pickup in consumer advertising and a proliferating number of authorized download services that make it easier to download songs on an a la carte basis.

Compressed-music portables were solely responsible for two consecutive years of factory-level sales growth in the portable-audio industry in 2003 and 2004 following two years of shrinking portable sales. Combined sales of all music-oriented audio portables (including CD- and cassette-based headphone stereos and boomboxes) rose 2.8 percent in 2003 and by 27.4 percent in 2004 to $2.18 billion, CEA statistics show. Those statistics exclude portable voice recorders and home radios. 

Beaming Satellite Radio to the Masses:

The selection of home and car satellite-radio tuners will grow substantially this year, as will the number of satellite-radio subscribers. By the end of 2004, the combined subscriber base of the country's two nationwide satellite-radio services, XM Satellite Radio and Sirius Satellite Radio, exceeded 4.41 million, up more than 180 percent from about 1.56 million at the beginning of 2004. The nationwide services expose radio listeners to a greater variety of musical genres and information than currently offered by local AM and FM stations, and they deliver the same programs nationwide so you can hear them without interruption when you’re driving through multiple metropolitan areas. 

Launching Digital AM, FM:

Digital AM and FM broadcasting is ready to rock and roll. The sound quality of digital FM stations will sound “statistically indistinguishable” from CDs, and AM stations will sound as good or better than today’s analog FM stations, according to iBiquity Digital, which developed the digital IBOC digital radio format. The technology also virtually eliminates FM multipath distortion and the familiar static, hiss, pops and fades associated with analog radio.

In mid-2004, three of the top 10 radio groups by station count – Clear Channel, Cox and Entercomm – announced aggressive rollout plans. In early 2005, they were joined by 18 other major station groups. Altogether, they and public radio stations committed to increase the number of digital stations to 2,500 during the next several years. By the end of 2005, iBiquity expects as many as 500 to 600 stations to deliver their programming simultaneously in analog and digital to 70-75 percent of the population. 

Delivering More Multi-channel Music:

DVD-Audio and Super Audio CD (SACD) continue to make slow-but-steady gains as the high-resolution surround sound successors to the two-channel CD format. The selection of DVD-Audio and SACD software continues to grow, as do the number of DVD-Audio and SACD players. To assuage consumer concerns over format wars, suppliers are increasing their selection of "universal" players that play discs in the DVD-Video, DVD-Audio, SACD and CD formats. These models start at around $129.

Designing for Today’s Lifestyles 

In 2005, the audio industry continues to broaden its base with products that simplify buying, set-up and operation while fitting unobtrusively in a home’s decor.

In the drive for simplicity, suppliers have aggressively marketed small, aesthetically pleasing all-in-one stereo music systems and home-theater-in-a-box (HTiB) systems. Stereo music systems, often called mini and micro systems, are compact devices that combine all of the elements of a bulkier hi-fi component system – AM/FM tuner, CD player, cassette deck, amplifier and speakers – into a single, less-intimidating purchase. They deliver everything you need to play back prerecorded stereo music.

HTiBs, in contrast, package all of the audio pieces needed to create a home theater surround sound experience. That includes 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.

Minisystems, microsystems and HTiBs have proven so popular that their combined factory-level sales rose a whopping $1.87 billion in 2004, once again exceeding sales of home audio components, according to CEA estimates. Components accounted for an estimated $1.14 billion in manufacturer revenue that year. As a result, systems accounted for 62 percent of 2004’s home audio sales, excluding small table radios and clock radios, CEA estimates show. That’s up from 1999’s 57 percent. 

Music Everywhere:

The industry is winning converts by keeping it simple. It’s also winning converts by developing products that reflect consumers’ changing lifestyles. 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.

As a result, home audio suppliers have begun offering a broad selection of under-cabinet CD/radios for the kitchen and small, high-performance one-piece tabletop radios and CD/radios for any room in the house. Increasingly, these and other products offer stylish cosmetics to look as good as they sound and to blend into a home’s decor.

Higher powered mini and micro systems, for example, sport furniture-grade 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.

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.

Even speakers have undergone radical cosmetic changes to overcome the aesthetic objections of décor-conscious consumers. Small speakers with slender, graceful shapes rapidly are replacing the squared-off boxes that were industry staples. To ride the coattails of popular flat-panel TVs, speaker makers in 2005 have unveiled 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.

Custom Options:
The popularity of custom-installed distributed-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 multiple rooms through in-wall and in-ceiling speakers– 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.

Audio Industry Outlook 
The audio industry played some flat notes in recent years while struggling to adapt to changing consumer lifestyles. Now, however, the industry’s fortunes are changing as radically as audio technology and consumer demand. Combined factory-level sales of home and portable audio grew in 2004 by an astounding 15.8 percent to $5.53 billion, following three consecutive years of declines. Dollar sales surged in home audio components (16.2 percent to $1.14 billion), MP3 headphone portables (184 percent to $1.2 billion), and compact music systems (23 percent to $900 million). Dollar sales rose a slight 1 percent in HTiBs to $971 million (due to rapidly falling average selling prices that almost completely negated a 34.4 percent unit-sale gain to 4.87 million units).

In the past, the maturity of many product segments contributed to the industry’s downturn. From June 2000 to January 2005, for example, household penetration of component home CD players held steady at 57 percent, CEA consumer surveys show. Fifty-two percent of households owned a headphone CD player in January 2005, marking no change from the year-ago period. The penetration of all-in-one home stereo systems fell from 43 percent in January 2002 to January 2005.

At the same time, new types of CE products such as videogames and computers emerged to compete for disposable income. High-priced HDTVs, some suppliers lament, also sucked up disposable dollars that might otherwise have been spent on high-performance home theater audio systems.

As a result, combined factory-level sales of home and portable audio equipment (including home radios) dropped for the third consecutive year in 2003, shrinking 6.5 percent to $4.78 billion, according to CEA statistics. That followed 2002’s decline of 10.7 percent and 2001’s drop of 9.4 percent.

The three-year slide set the combined home/portable market back to levels not seen since the mid-1980s, CEA statistics show. 

Turnaround Ingredients:
When 2004 rolled around, few marketers expected a snap-back in home audio sales, and few marketers expected a near-tripling of MP3 headphone stereo sales. In retrospect, however, the ingredients for a dollar-sales surge were in place.

During the past two years, for example, retailers began to more aggressively promote home audio components as a step-up, higher fidelity (and higher profit) alternative to HTiBs. Aggressive advertising, falling prices and a proliferation of legally available music downloads contributed to gains in MP3 head-phone stereos. And a host of new features, such as MP3-CD playback and networking, may have prompted consumers to trade in their old compact music systems. 

2005 Forecast:
Overall factory-level sales will continue to rise in 2005, although not at 2004 rates, CEA forecasts show. Combined home and portable audio sales will rise 2.2 percent in 2005 to $5.65 billion. All of the gain will be attributable to rising portable audio sales, and all of those gains will be attributable to MP3 headphone stereo sales.

Portable sales will rise 16.4 percent to $2.64 billion, driven by a 37 percent increase in MP3 headphone sales to $1.65 billion. The MP3 gain will offset a forecast 9.3 percent decline in sales of other portable-audio devices to $889 million.