Once upon a time, Silicon Valley's largest customers were the military and the government, mostly buying mainframes. The
market was broadened when mid-range computers began replacing mainframes. It really boomed when microprocessor-based PCs replaced
mid-range machines. Just as PC growth was flattening, cell phones ramped up to keep component volumes high.
Today consumer electronics is all the rage. VC money is pouring into "connected home" start-ups. The market potential is
larger than all the rest-- combined.
No one likes to point out consumer electronics sales are also notoriously fickle. Product lives are short. Profits, if
any, are often fleeting. Even so, it's what 'we have, so let's deal with it.
The local paper recently published a list of 39 major electronics products and their 2004 retail holiday sales vs. 2003.
You knew there was going to be trouble when enough detail was published to unleash my 7th grade algebra.
Total 2004 retail sales were $5.313B, up $271M, or 5.37%, over 2003. Not earth-shattering, but not too bad!
At second glance, 2004's CPI inflation was ~3.3% reducing the net to 2.07%.
At third glance, the 2004 pre-Christmas holiday season was 28 days, compared to only 27 in 2003. Backing out the extra
3.7% shopping window and +5.37% into a negative: -1.63%.
Even allowing for on-line (non-retail) sales growth, this is not consistent with the end-of-year run-ups in semiconductor,
goods-producer and retailer stock prices.
Even more interesting is the categories showing growth, or lack of it:
MP3 player dollar sales were up 174% accounting for 65% of the $271M net increase. MP3 players now weigh in at 5.2% of
the total category. (Showing iPOD has some numbers to go with the hype.) Assuming PC speaker sales are driven by MP3 players
increases the weight of this category to 5.7%.
Satellite radio was up 219%, accounting for 16% of the $271M net gain. (But only 1.2% of $5.3B.)
TV sales (21% weight) were up only $618K, or 0.23% of $271M. Despite the hoopla, net new TV sales are not driving the consumer
electronics upward.
"Imaging" (18% weight, digital cameras, camcorders, photo printers and paper) accounts for 37% of the net increase. (The
net gainers mentioned can exceed 100% since there are also net losers.)
DVR sales up 41% (in $) but only account for 4% of the $271M increase (and less than 1% of the $5.3B). This understates
DVR sales, since satellite and cable companies are not included. As an aside, TiVo's $50M campaign targeted to add '200,000-275,000"
new subscriptions over the holidays exceeds the entire 161K increase in this category. Dos this explain why execs are jumping
ship over at TiVo lately?
PCs account for 16% of the $5.3B total (31% when you add mice, keyboards, hard drives, inkjet printers and cartridges,
etc). Obviously, these numbers understate PCs' impact, since Dell, Gateway and part of HPQ sell on-line. Desktop +notebook
retail sales were 6.6% of the $271B increase which isn't too bad, given an annual global TAM around 190M systems. (FYI, desktop
dollar sales were -19%, offset by notebooks +26%).
Surprisingly, PCs leap from 6.6% of the increase all the way to 49% when you add in the accessories.
Unexplained is why Intel (21 P/E, 4.6 time sales) and Microsoft (28 P/E, 7.4x) are still popular investments, considering
their dependence on a market which claims 6.6% growth is good news.
Prominent on the downside were DVD-related (-31%) and CD-related (-23%) products.
All you astute readers quickly noticed cell phone sales are totally absent from the list. With reports touting 200M cell
phones shipped 4Q04, unit volume was clearly up. Given the growing prominence of camera and web capabilities, electronics
content is also up. However, with a 1Q04 -3Q04 run-rate at maybe~155M, there are now millions, even tens of millions, of unsold
cell phones waiting to be sold in 2005.
Clearly $5.3B is not a market anyone can ignore. Finding CY04 holiday retail sales, normalized for inflation and an extra
shopping day, were down is totally unreported in the press. Even an unadjusted increase of 5% is marginal, given the hype
and stock valuations surrounding many of the players.
If these are "strong" numbers, what will "weak" ones look like?
Also once upon a time, a significant proportion of what Silicon Valley companies sold was produced in Silicon
Valley. Today, NONE of the end-products are produced locally. Only a few of the ICs are even built here anymore.
With local employment at a 10-year low, what does this tell us about the prospects for a recovery in Silicon Valley employment?
How about the prospects for maintaining our all-time highs in home prices?
