Flat Chance

By MICHAEL SCHUMAN Adam Pitluk/Dallas; Laura A. Locke/San Francisco; Coco Masters; Toko Sekiguchi/ Tokyo; Joyce Huang/Taipei

DOUG GALE, A 30-YEAR-OLD Dallas banker, returned from a vacation to Tokyo and Hong Kong in 2001 raving as much about TV sets as about ancient temples, towering skyscrapers and exotic food. A self-proclaimed tech geek, Gale scouted out electronics shops and was mesmerized by flat-screen TVs. Their monstrous sizes, sleek designs and flashy displays were perfect, he thought, for watching his favorite Dallas Stars charge down the ice. "I'd never seen anything like them," he says of the TVs. "They were just phenomenal. As soon as I got back to Dallas I was thinking, 'I got to get me one of these!'"

Three years later, Gale's living room is still dominated by an old picture-tube clunker. He routinely stops in Best Buy and Circuit City stores to compare prices, but the model he craves, a 45-in. cutting-edge liquid-crystal display (LCD) TV, has a $7,000 price tag--twice what Gale is willing to spend. "These things are still prohibitively expensive," Gale laments.

Sound familiar? While it seems as though hordes of couch potatoes are snapping up the latest displays, the wonders of LCD and plasma TV technology are still well out of reach for the average shopper. True, at retailer Circuit City, sales of flat-TV models have tripled over the past year, prompting CEO W. Alan McCollough to label this Christmas "a flat-panel holiday." But as long as the price tag on a flat-screen TV is four or more times as much as a comparable tube TV, many consumers will drool and dream but not bite. "Prices [of flat TVs] will be cheaper for consumers this holiday season, but not cheap enough to have them explode off the shelves," says Chris Connery, vice president of market research at DisplaySearch, a consulting firm based in Austin, Texas.

It's a virtual lock that the magic price point--at which flat-panel TVs switch from being a status symbol of the rich and hip to an everyday feature in American living rooms--will be reached in the near future. That's because the Asian consumer-electronics companies that dominate the flat-panel industry are building too many factories too fast. A glut is in the offing, and while prices have already been falling, more rapid declines are expected. Consulting firm iSuppli Corp. estimates that a 37-in. LCD TV that now retails for more than $4,000 will cost half as much in 2006 and is likely to be less than $1,000 by 2008. Plasma TVs will also see prices decline. A 42-in. plasma set that costs on average $2,700 today will probably fall to under $1,000 by 2007.

Lofty prices have kept the market for flat-screen TVs small so far. Plasma technology dominates in supersize TVs over 40 in., but plasma will hold only 2% of the U.S. TV market this year. More consumers buy LCD TVs, which are available in a wider range of sizes, but they still only account for less than 10% of the market. Dropping prices will change that, especially with LCD TVs, which manufacturers are gearing up to churn out the fastest. By 2008, 1 of every 3 TVs sold will be an LCD, according to iSuppli. The U.S. is catching up to some other rich countries. In Japan, where consumers are among the most technologically savvy and are much more space conscious, about 1 in 4 TVs sold is an LCD. "In the long run, [LCD TVS] will be a major part of the business," says Paul Semenza, an iSuppli vice president.

If you still think $1,000 is too much to pay for a TV set, consider yourself part of the spoiled Wal-Mart generation. In the 1950s, when the cathode-ray tube was cutting edge, an average TV cost about $1,000, according to Semenza. Adjusted for inflation, that's $6,700 today--comparable to the most advanced flat-screen TVs. The advent of the flat TV is seen by an electronics industry accustomed to razor-thin margins as a chance to reap some fat profits from a new technology. Japan's Sharp Corp. announced this month that sales of LCD TVs contributed to pushing up profits 40% in the first half of this fiscal year.

Those chunky margins have led just about every big name in electronics to pile into flat screens--especially the production of the glass LCD panel that is the primary, and most expensive, component in an LCD TV. Asian companies in South Korea, Taiwan and Japan dominate this side of the business. Much like semiconductors, LCD panels are manufactured in clean-room factories that require massive investment. Ten new plants costing around $20 billion will start up between now and the end of 2005, increasing the industry's production capacity by 70% next year. Even more are on the drawing board. In August, Japan's Hitachi, Matsushita and Toshiba announced a $1 billion joint venture to produce LCD panels starting in 2006.

By early next year, Asian factories will be churning out more large panels for LCD TVs than customers will want to buy, and the oversupply will depress panel prices. The new factories, most of which will specialize in large-size panels, should be able to produce the panels at a lower cost. With cheaper panels, TV makers can afford to sell LCD TVs at lower prices. "Manufacturers [of LCD panels] will have to cut prices substantially, and that should be positive news for the TV business," says Ryota Sugishita, a technology analyst at Daiwa Institute of Research in Taiwan. Sugishita expects LCD-TV prices to plummet 30% a year.

But as panel prices drop, so will margins, potentially forcing some weaker players out of the business. There are already signs of a shake-out. In September, Taiwan's Chi Mei Optoelectronics halted construction on a panel factory. Japan's Mitsubishi Electric said it will phase out production of large LCD panels altogether, filling its TV sets with panels made by other companies. Even market leader LG.Philips LCD, a joint venture between Korea's LG Electronics and the Netherlands' Royal Philips Electronics, raised a disappointing $1 billion in a July IPO because of jitters about oversupply. Competition will only intensify as Chinese companies like BOE Technology expand their production next year. LG.Philips LCD and Korean rival Samsung Electronics, the two largest makers of LCD panels, may be best placed to weather any downturn because of their large market shares, strong technology and deep pockets. Analysts are most worried about smaller Taiwanese companies. Under current market conditions, "manufacturers have very little to gain," says Hitoshi Kuriyama, a consumer-electronics analyst at Merrill Lynch in Japan. "The winner is the consumer."

To get a look at where LCD-TV prices are headed, wander over to the PC side of your neighborhood electronics store and check out the flat computer monitors. You'll probably find that small LCD TVs are marked up 50% or more, compared with monitors of the same size. LCD TVs often have brighter screens and niftier designs that add to the cost of making them, but the real reason the TVs are more expensive is low volume. With fewer TV sets sold, retailers often tack on higher margins. Prices will also be brought down by competition between LCD and plasma screens. At very large sizes, plasma screens--which use electrically charged pixels of gas to create a picture--are cheaper than LCDs, and at sizes over 50 in., your only choice is plasma. But LCD technology, which involves creating a picture by passing light through charged crystals, is catching up. This month in Japan, Sharp wowed the crowd at a technology expo by unveiling a Ferrari-red 65-in. LCD TV, the world's largest. Prices of plasma TVs should fall as manufacturers build more efficient plants, but not as quickly as the prices of LCD TVs.

Lower pricing is only one factor driving consumers toward flat TVs. More and more television programming is offered in high-definition, or HDTV, format, which should boost LCD TV sales. (Traditional TVs can show HDTV programming, but sometimes not as crisply as LCD TVs, which are almost all HDTV ready in larger sizes.) In the not-too-distant future, flat TVs will be hooked up to PCs, which will record movies on a hard-disc drive. And then there's the get-the-neighbors-talking factor. Ritch Wheeler, 33, a sales manager for DaimlerChrysler from Denton, Texas, recently bought a 42-in. plasma TV on the Internet from Gateway for $3,000 and has got an instant popularity boost. "Everybody who walks into the house comments on the TV," he boasts. "They look at it like the piece of wall-mounted art that it's supposed to be. It really does look cool." Wheeler eventually wants to cover his living-room walls with three huge flat TVs. "It'll be like living in a sports bar," he says.

The advice from technology experts: suppress the urge to splurge, ideally until late 2005 or 2006. But in the end, it looks as though it will be only a matter of time before your old TV is as obsolete as a VCR or cassette player. "In 10 years' time, it'll be embarrassing to have a regular, old-fashioned TV set," says Martin Reynolds, an analyst at technology-consulting company Gartner in Stamford, Conn. If the Asian glut continues, chances are you'll be able to have a flat TV hanging in your living room long before that. --With reporting by Adam Pitluk/Dallas, Laura A. Locke/San Francisco, Coco Masters and Toko Sekiguchi/ Tokyo, and Joyce Huang/Taipei