EQUIP YOURSELF
Feb 1, 2000 12:00 PM, Jared Blankenship
The NSCA commissioned Frost & Sullivan to research the size of the audio industry, and the findings have a significant impact upon the A-V contracting segment.
During the manufacturer's council meeting at last year's Expo, the NSCA released preliminary results from the research report it had commissioned Frost & Sullivan to develop, focusing on the investigation and analysis of the North American market for professional and commercial audio products, specifically mics, amps, mixing consoles, loudspeakers, control products and related accessories. Underlying the research project were a number of primary objectives, the first of which was to determine the overall wholesale revenue size for the North American audio market in addition to the estimated sizes of each of the aforementioned product categories. The second goal was to ascertain the means by which this revenue is distributed within the application segments of live or portable sound reinforcement, installed sound reinforcement, recording and post production, broadcast, and cinema exhibition. The next step involved determining the relative size of the distribution channels of contractors and dealers, retailers, wholesalers and distributors, and direct-to-end-user sales. From the gathered data, information on current trends in product, application and distribution channel segments was extrapolated.
"Before this survey was released, people could only offer educated guesses on the size of the commercial audio industry and the product categories within it," said Chuck Wilson, NSCA executive director. "With the new research, we now have accurate statistics on current size and forecasts for the future. This information will be invaluable for companies searching for growth opportunities."
Released last year, the research project's executive summary, which is available online to NSCA members at www.nsca.org, provides key numbers and market issues. The full report, however, takes the information further. Included in it are a complete discussion of the research scope and methodology, an examination of eight critical issues facing the industry today, more than 70 forecast charts for product, application and channel segments, and extended presentation of conclusions and strategies, and an appendix that describes how to use the data contained in the report. For the purpose of this article, I will focus primarily upon what some of the key findings mean to you, the systems contractor, and some of the means by which you can use this information to help you run your business more effectively.
It is important to point out that previous research conducted along similar lines has often produced inconsistent results, which is attributable to the industry's fragmented nature and the blurring of the lines between various applications. Consequently, researchers have found it difficult to verify earlier data on commercial and professional segments. Further complicating matters, many of the large number of companies in the industry are privately held, and most have been understandably reluctant to share information about themselves. The confidentiality helped ensure that manufacturers would be more forthcoming in providing information.
Key findings
As shown in Table 1, manufacturers in the professional audio industry have, from 1995, experienced a steady increase in revenue, and it is projected to continue along those lines for the next few years. According to the report, 54% of the generated revenues were distributed among contractors and dealers. Although the correlation is not completely direct, it can be inferred that manufacturer success is reflective of similar revenue growth as experienced by systems contractors. Also indicated is a sort of symbiotic relationship between manufacturers and systems contractors; manufacturer growth in revenue would likely not have been possible without corresponding growth on the contractor's side of the fence.
Bear in mind that revenue refers only to wholesale revenues generated by professional and commercial audio equipment categories. Revenue figures represent the actual value of the goods shipped or sold by manufacturers. They do not, however, take into account or represent the value of revenues produced by such other income sources as design and consultation fees, labor or other services. Similarly, they do not actually include profit margins generated by contracting or installation companies.
Although the percentages of revenue growth may seem somewhat small when compared to other industries, be thankful for the steady increase. Semiconductor growth, for example, was 42% in 1995, but in 1996, it fell to -9% (Semiconductor Industry Association, Dataquest). Admittedly, revenue growth is not expected to be nearly as explosive as what the e-commerce is predicted to encounter, but again, there is something to be said for the stability implied by this report.
Figure 1 illustrates the 1998 end-user application revenue for the North American commercial and professional audio products market. As the chart indicates, installed sound reinforcement (36%) and live and portable sound reinforcement (33.3%) account for approximately two thirds of the total revenue generated in 1998 ($1.2 billion and $1.1 billion, respectively). Recording and post production (13.7%), broadcast applications (6.4 %) and cinema exhibition (10.7%) account for the remaining third, generating $452 million, $210 million and $352 million, respectively. Although the cinema exhibitions category, which includes video presentation applications, seems to generate a comparatively minute amount of revenue, keep in mind that the figures represent revenues only for the audio segment of our industry. I am certain that the numbers for the video manufacturers would be quite different.Figure 2 shows the 1998 distribution channel revenues for the North Ame rican commercial and professional audio products market. By far, contractors and dealers (a category that includes systems integrators) represent the largest channel through which manufacturers' products reach the end user (54% or $1.8 billion). Not far behind is the retail channel at 35.2% ($1.2 billion), which includes any business that sells components of sound systems and is focused on commercial and professional installations or users (for example, stores that sell musical instruments, professional audio specialty retailers and broadcast equipment retailers). Not quite as prevalent are the wholesaler and distributor channels (6.2% or $203 million) and the direct-to-end-user channel (4.3% or $141 million). Evident in this chart is the strong relationship between the manufacturer and the systems integrator.
Critical issues
The research brings a number of important industry issues to light that pose new challenges to manufacturer and contractor alike. Among them is the newer trend toward blurring the lines among distribution channels. Although these distribution channels have remained fairly stable over the years, the same can no longer be said. It seems that various channel members are seeking new opportunities in those business avenues traditionally enjoyed by contractors. A clear example of such a breach of territory involves the large national music retail or home electronic store that now offers installation and consulting services.
Admittedly, this presents somewhat of a threat to the contractor, but it is not one that cannot be defeated or, at the very least, marginalized. Because businesses new to the A-V installation and consulting industry are, when all is said and done, newcomers, you are given a bit of time to react before they fully establish themselves as viable alternatives. Through an effective marketing campaign, emphasize your strengths and highlight the weaknesses, especially in service, inherent in the means by which these larger, jacks-of-all-trades companies operate. Sure, potential customers may opt to have the large retail chain's staff come to their apartment to set up a mid-grade home entertainment system, but those customers were probably never in the market for a high-end system in the first place. It is essential that you first retain your existing customer base and then discover new ones before they wander into that behemoth of a store and wind up engaging their installation services when the cashier asks if there is anything else they would like with their purchase.
Another challenge, one more that faces every company in the industry, involves the relative shortage of qualified personnel, especially engineers and salespeople. The effects of the currently strong U.S. economy upon the job market are well documented; a good economy means companies are growing, and they can, in turn, afford to hire more people. The problem, however, runs deeper. It is not a stretch of the imagine to say that it requires a certain personality and mental acuity to drive a student through the years of intense course-work required to land an engineering degree. When planning that course-work, it is increasingly difficult for students to overlook the lucrative rewards of a career in the computer industry. In essence, the audio industry is losing engineering talent even before students step beyond the halls of academia. Over time, the companies in the audio industry may be forced to expend considerable effort fighting over the few scraps of available talent.
Solving the problems inherent in a tight job market will probably require the development of far-reaching, long-term strategies. Cynics would point out that economy will eventually sour, perhaps changing the dynamics of the job market, but a poor U.S. economy presents problems of its own, and it would be better to face those problems with a competent, well-trained staff already in place. Long-term solutions might mean culminating potential engineering talent earlier in the educational process, perhaps early in high school. Another possibility would be providing education and training to the raw talent that may already be working for your company; not everyone may have had the financial means required to fund a four-year college degree. Developing your in-house talent can also help you prevent good people from jumping ship for the competition. It may not even be so far fetched to initiate recruiting efforts abroad, especially in countries who are not currently experiencing an economy as strong as the United States'. For more information on hiring in today's tight job market, see "Assembling the Team," page 28.
Also revealed by the research is the fact that the audio industry faces an increasingly technologically savvy consumer. Consequently, these consumers are placing higher demands on the audio quality of their purchases. The burden that this trend places on manufacturers is obvious, but it affects contractors as well. Given an open budget, it is probably not too difficult to meet or exceed a client's expectations, but as you probably know, that is rarely the case. Meeting increasing client expectations on a limited budget, however, is the true challenge, and meeting those expectations may eventually be downright impossible without a good staff.
Conclusions
Ultimately, the research has shown that although the road ahead may have its share of bumps, the overall outlook is a good one. The distribution channel with the strongest expected growth over the next three years is the contractor channel at 13% compound annual growth rate (CAGR). Further, the two applications with the most anticipated growth through 2002 are the installed sound reinforcement and cinema exhibition categories at 13% CAGR. The overall product segment with the most projected growth is the control products segment at 22% CAGR, which equates to more than $500 million. As control products and systems become a more integral part of the market, it is expected that contractors will be an increasingly important part of the industry. In the end, however, this is all only an overview of the big picture. For information on purchasing the full research report, contact the NSCA at 800-446-6722.
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