Feb 1, 2000 12:00 PM, Jared Blankenship
The NSCA commissioned Frost & Sullivan to research the size of the audioindustry, and the findings have a significant impact upon the A-Vcontracting segment.
During the manufacturer's council meeting at last year's Expo, the NSCAreleased preliminary results from the research report it had commissionedFrost & Sullivan to develop, focusing on the investigation and analysis ofthe North American market for professional and commercial audio products,specifically mics, amps, mixing consoles, loudspeakers, control productsand related accessories. Underlying the research project were a number ofprimary objectives, the first of which was to determine the overallwholesale revenue size for the North American audio market in addition tothe estimated sizes of each of the aforementioned product categories. Thesecond goal was to ascertain the means by which this revenue is distributedwithin 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 sizeof the distribution channels of contractors and dealers, retailers,wholesalers and distributors, and direct-to-end-user sales. From thegathered data, information on current trends in product, application anddistribution channel segments was extrapolated.
"Before this survey was released, people could only offer educated guesseson the size of the commercial audio industry and the product categorieswithin it," said Chuck Wilson, NSCA executive director. "With the newresearch, we now have accurate statistics on current size and forecasts forthe future. This information will be invaluable for companies searching forgrowth opportunities."
Released last year, the research project's executive summary, which isavailable online to NSCA members at www.nsca.org, provides key numbers andmarket issues. The full report, however, takes the information further.Included in it are a complete discussion of the research scope andmethodology, an examination of eight critical issues facing the industrytoday, more than 70 forecast charts for product, application and channelsegments, and extended presentation of conclusions and strategies, and anappendix that describes how to use the data contained in the report. Forthe purpose of this article, I will focus primarily upon what some of thekey findings mean to you, the systems contractor, and some of the means bywhich you can use this information to help you run your business moreeffectively.
It is important to point out that previous research conducted along similarlines has often produced inconsistent results, which is attributable to theindustry's fragmented nature and the blurring of the lines between variousapplications. Consequently, researchers have found it difficult to verifyearlier data on commercial and professional segments. Further complicatingmatters, many of the large number of companies in the industry areprivately held, and most have been understandably reluctant to shareinformation about themselves. The confidentiality helped ensure thatmanufacturers would be more forthcoming in providing information.
As shown in Table 1, manufacturers in the professional audio industry have,from 1995, experienced a steady increase in revenue, and it is projected tocontinue along those lines for the next few years. According to the report,54% of the generated revenues were distributed among contractors anddealers. Although the correlation is not completely direct, it can beinferred that manufacturer success is reflective of similar revenue growthas experienced by systems contractors. Also indicated is a sort ofsymbiotic relationship between manufacturers and systems contractors;manufacturer growth in revenue would likely not have been possible withoutcorresponding growth on the contractor's side of the fence.
Bear in mind that revenue refers only to wholesale revenues generated byprofessional and commercial audio equipment categories. Revenue figuresrepresent the actual value of the goods shipped or sold by manufacturers.They do not, however, take into account or represent the value of revenuesproduced by such other income sources as design and consultation fees,labor or other services. Similarly, they do not actually include profitmargins generated by contracting or installation companies.
Although the percentages of revenue growth may seem somewhat small whencompared 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, revenuegrowth is not expected to be nearly as explosive as what the e-commerce ispredicted to encounter, but again, there is something to be said for thestability implied by this report.
Figure 1 illustrates the 1998 end-user application revenue for the NorthAmerican commercial and professional audio products market. As the chartindicates, installed sound reinforcement (36%) and live and portable soundreinforcement (33.3%) account for approximately two thirds of the totalrevenue generated in 1998 ($1.2 billion and $1.1 billion, respectively).Recording and post production (13.7%), broadcast applications (6.4 %) andcinema exhibition (10.7%) account for the remaining third, generating $452million, $210 million and $352 million, respectively. Although the cinemaexhibitions category, which includes video presentation applications, seemsto generate a comparatively minute amount of revenue, keep in mind that thefigures represent revenues only for the audio segment of our industry. I amcertain that the numbers for the video manufacturers would be quite different.Figure 2 shows the 1998 distribution channel revenues for the North American 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 reachthe end user (54% or $1.8 billion). Not far behind is the retail channel at35.2% ($1.2 billion), which includes any business that sells components ofsound systems and is focused on commercial and professional installationsor users (for example, stores that sell musical instruments, professionalaudio specialty retailers and broadcast equipment retailers). Not quite asprevalent are the wholesaler and distributor channels (6.2% or $203million) and the direct-to-end-user channel (4.3% or $141 million). Evidentin this chart is the strong relationship between the manufacturer and thesystems integrator.
The research brings a number of important industry issues to light thatpose new challenges to manufacturer and contractor alike. Among them is thenewer trend toward blurring the lines among distribution channels. Althoughthese distribution channels have remained fairly stable over the years, thesame can no longer be said. It seems that various channel members areseeking new opportunities in those business avenues traditionally enjoyedby contractors. A clear example of such a breach of territory involves thelarge national music retail or home electronic store that now offersinstallation and consulting services.
Admittedly, this presents somewhat of a threat to the contractor, but it isnot 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 reactbefore they fully establish themselves as viable alternatives. Through aneffective marketing campaign, emphasize your strengths and highlight theweaknesses, especially in service, inherent in the means by which theselarger, jacks-of-all-trades companies operate. Sure, potential customersmay opt to have the large retail chain's staff come to their apartment toset up a mid-grade home entertainment system, but those customers wereprobably never in the market for a high-end system in the first place. Itis essential that you first retain your existing customer base and thendiscover new ones before they wander into that behemoth of a store and windup engaging their installation services when the cashier asks if there isanything 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 engineersand salespeople. The effects of the currently strong U.S. economy upon thejob 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 acertain personality and mental acuity to drive a student through the yearsof intense course-work required to land an engineering degree. Whenplanning that course-work, it is increasingly difficult for students tooverlook the lucrative rewards of a career in the computer industry. Inessence, the audio industry is losing engineering talent even beforestudents step beyond the halls of academia. Over time, the companies in theaudio industry may be forced to expend considerable effort fighting overthe few scraps of available talent.
Solving the problems inherent in a tight job market will probably requirethe development of far-reaching, long-term strategies. Cynics would pointout that economy will eventually sour, perhaps changing the dynamics of thejob market, but a poor U.S. economy presents problems of its own, and itwould be better to face those problems with a competent, well-trained staffalready in place. Long-term solutions might mean culminating potentialengineering talent earlier in the educational process, perhaps early inhigh school. Another possibility would be providing education and trainingto the raw talent that may already be working for your company; noteveryone may have had the financial means required to fund a four-yearcollege degree. Developing your in-house talent can also help you preventgood people from jumping ship for the competition. It may not even be sofar fetched to initiate recruiting efforts abroad, especially in countrieswho are not currently experiencing an economy as strong as the UnitedStates'. 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 anincreasingly technologically savvy consumer. Consequently, these consumersare placing higher demands on the audio quality of their purchases. Theburden that this trend places on manufacturers is obvious, but it affectscontractors as well. Given an open budget, it is probably not too difficultto meet or exceed a client's expectations, but as you probably know, thatis rarely the case. Meeting increasing client expectations on a limitedbudget, however, is the true challenge, and meeting those expectations mayeventually be downright impossible without a good staff.
Ultimately, the research has shown that although the road ahead may haveits share of bumps, the overall outlook is a good one. The distributionchannel with the strongest expected growth over the next three years is thecontractor channel at 13% compound annual growth rate (CAGR). Further, thetwo applications with the most anticipated growth through 2002 are theinstalled sound reinforcement and cinema exhibition categories at 13% CAGR.The overall product segment with the most projected growth is the controlproducts segment at 22% CAGR, which equates to more than $500 million. Ascontrol products and systems become a more integral part of the market, itis expected that contractors will be an increasingly important part of theindustry. In the end, however, this is all only an overview of the bigpicture. For information on purchasing the full research report, contactthe NSCA at 800-446-6722.