Thursday, October 1, 2015

Does Competition Exist in the Audio/Video Community?

I have written about some of the various questionable sales tactics that exist in the audio / video community in the past, but as I’ve been doing some shopping lately I’ve witnessed even more head-shaking behavior by several different manufacturers.  For the most part, the industry does a fairly good job in policing itself and in the era of online reviews and blogs it is more difficult to con the consumer than it has been in years past… but as I will show, it most certainly is not impossible.  

Rebadging: A Product by Any Other Name…  

One of the trends I’ve started to notice is simply rebadging one product under the name of an entirely different brand or manufacturer.  This isn’t all that unusual of course and we have seen this occur in a variety of different industries over the years including automobiles, cosmetics, clothing and food. 

Whether it be a Toyota Matrix being sold as a Pontiac Vibe, or a package of ice cream being sold under the Edy’s label in one area but Dreyer’s in another, this type of situation occurs each and every day.  That in itself isn’t really an issue, because over time some companies have purchased other companies and brands have merged, or in some cases (such as mattress sales) the industry uses different brands to prevent direct comparison shopping.  

We have seen situations for years where a manufacturer will produce a single product (lawnmowers, snowblowers, and bicycles for example) and then they will sell that product with different paint colors and badging to different stores.  So while one store offers a Husky snowblower, you might find a Yard Machines snowblower down the street that is identical aside from a few stickers and the color.  Another store might have a Bolens snowblower, while another has a model with the Toro brand.  They might all use the same parts, the same engines, and come from the same assembly line, but to the casual observer they appear as competitors.  

Another example from several years ago was when I noticed some “Scott’s” brand lawn tractors for sale at Home Depot, but a year later that same exact model was sold under the John Deere brand name.  It was obviously the same tractor aside from some decals and badging, but you can bet the John Deere version sold better and it most likely reflected a premium price.  I’ve found this same scenario time and time again throughout the power equipment industry, but there are many, many less obvious examples such as oil filters, canned goods, generic pharmaceuticals, and batteries.

The Competition Really Isn’t   

As is the case with many industries we also see this same rebadging scenario within the consumer electronics industry, and just like with garden tractors or snowblowers sometimes the appearance of a competitor can be deceiving.  For instance, you can purchase an Onkyo home theater receiver that is practically identical to a model sold under the Integra name.  Both are made by the same parent company and in some cases they share the same chipsets, specifications, and features – yet the Integra model can run hundreds of dollars more.  Someone buying an Integra might feel they are getting a better, more exclusive product, and I’m sure the salesman will try to present it that way, but they might have a hard time explaining why a few years ago when Onkyo had to issue a recall due to some defective components, that Integra had to do the same.

The thing is, Integra is typically sold via a select dealer network which includes custom installers.  So these installers can sell a unit to a customer as part of a home theater room install and they can explain that they are the exclusive dealer in the region.   Integra limits pricing to MSRP with very little room for adjustment, so if the customer happens to shop around they will find no matter where they look they will be spending about the same.  Now think about an installer that jacks up the price of an Onkyo, and then the customer types the model number into Google only to find out they spent $1200 for a receiver that retails for $799 on Amazon.  In this case, it makes sense for Onkyo to offer a standalone product under a different brand.  They can offer a different warranty (Integra will come with a full three year warranty while the Onkyo twin will only include a year) and they can ensure it is only sold via a select number of hand-picked installers who cater to that specific customer market.  

Another example of this is Runco, a high-end brand of home theater equipment (primary televisions and projectors).  Runco is a subsidiary of Planar technologies, and as one might expect there have been numerous products sold under both the Planar and Runco names that were practically identical aside from minor cosmetic differences or changes in firmware.  In the past, Runco sold televisions that were essentially rebadged NEC (Pioneer) models, and rumors of them rebadging products from others live on in many audio and video discussion forums.  In some cases this may be justified if there are significant changes from the base model or when they are simply outsourcing for select components and then enhancing them, but one starts to wonder at what point is someone merely paying a significant price premium for a product that just happens to carry a high end brand name?  

The R&D Problem   

The problem with some of these boutique manufacturers is they tend to cater towards a high-end segment.  A company like Sony or Samsung might offer numerous different models of televisions or home theater receivers designed to appeal to consumers at all pricepoints, but the bulk of their volume will come from the end-user community who purchases a device, takes it home, hooks it up, and uses it.  On the other hand a company like Runco is more likely to sell their products through dealers/installers who work with a client to design a system and then the dealer handles the installation of the system.   Because this high-end market is significantly smaller than that of the mass-market segment, companies who sell these high end products know up front that their sales volume will be much lower.

So how does a company cover all of their research and development (R&D) costs when they know they will only sell a limited number of units?  It seems there are two possible options – number one they simply raise the price of the end product to compensate, so the percentage of that product devoted to R&D ends up being significantly higher than it would be on a mass-market product.  The second option is to lower R&D costs by either outsourcing some of the development or engineering, or by building upon existing technology.  Both of these options are used with great success in the market, and I’ll talk about each next.  

Raise Prices to Capture Costs   

In the first scenario a company simply raises the price of the product to compensate for their R&D, which logically results in a product being more expensive (often significantly more expensive) than the competition.  In some cases this increased cost may even be justified because the product is a substantial improvement over standard offerings, but I have seen many times where the more expensive product isn’t actually superior to one sold at a much lower pricepoint.  If you think about it, this is a difficult situation as a large company who sells millions of units every year will obviously have a much larger R&D budget.  They can spend a lot more to develop new products knowing the costs will be distributed over a much larger number of units sold.  On the other hand, a small niche company will not have as large of a budget and will not produce as many products, therefore they are not as able to absorb losses if a product fails in the marketplace.  In some cases the only way to compete is to charge significantly more for their product while trying to convince the consumer that the price is justified.  

The Example   

To use an example, let’s pretend there are two companies developing projectors for the home theater market.  For this example, the companies are called “Epsomate” and “Rumcorp” (of course any resemblance to existing companies is purely coincidental).  

Epsomate spends $20MM in R&D to develop their latest projector.  They expect to sell 250,000 units worldwide, and the cost of components including assembly in their new design will run around $1200.  So if we forget about marketing, administrative, or other expenses, Epsomate would need to see each of those 250,000 projectors for at least $1280 just to break even.  

Now let’s look at Rumcorp.  Because they wish to be an industry leader, then tend to spend more on R&D than their competition in an effort to produce a higher end product.  In this example they spend $30MM in R&D to develop their latest model.  However, since Rumcorp is a much smaller high-end company, they can expect to only spend a fraction of the amount of projectors that Epsomate might sell, and in this case they predict they will see around 20,000 units worldwide.  The cost of components including assembly is higher due in part to smaller volumes (suppliers are less likely to give discounts for smaller quantities) and due to them specifying components with tighter tolerances.  In this example cost of components including assembly is $1600. Again we exclude marketing, administrative and other general expenses which results in Rumcorp needing to sell each of those 20,000 projectors for at least $3,100 just to break even.

So at this point the Rumcorp projector already needs to retail for at least 240% more than the Epsomate projector.  That in itself limits their market, but when you also consider efficiencies of scale that Epsomate may have and how they can use some of the technology from their latest projector on several models designed for the business community or for the educational segment you start to realize how the smaller custom segment is at a disadvantage.  Then you start to realize that a full page advertisement in Sound and Vision magazine is going to cost just as much for Rumcorp as it does with Epsomate, meaning their marketing expenses may not be substantially different (although there is a chance Rumcorp would forego any marketing and instead focus upon training their dealer network).  

Next you realize that the Epsomate model will be sold through a variety of brick and mortar stores as well as online from numerous different sources while the Rumcorp model will only be sold through a pre-selected integrator/installer network where price-matching and comparison shopping is all but impossible… and you suddenly realize it is entirely feasible that the Rumcorp projector may end up costing three or four times what the Epsomate projector costs regardless of the performance.  

So what happens when someone decides to compare the two projectors side by side and they realize the differences in performance are rather minor?  What happens when the high end projector produces a better picture, but not substantially improved over the projector that costs a fraction of the Rumcorp? What happens when a typical consumer cannot discern a difference between the two at all, or what if an actual industry analyst is unable to consistently pick the more expensive projector during blind testing?  

The truth is, price isn’t always indicative of quality, and when it comes to audio and video equipment, often times the increased cost of a higher end brand has more to do with dealer markup and higher profit margins than it does with better components or design.  This is why when you read unbiased reviews and when you compare specifications on some high-end equipment you often find the higher end brands fail to impress.   It isn’t that they aren’t good products, but they often aren’t good values. 

Most people aren’t willing to spend four or five times more for a product that has only a marginal improvement in performance, especially when that marginal improvement is practically undetectable outside of a lab.  Of course those that do spend much more for the boutique brand products may attempt to justify their purchases by proclaiming they can discern a massive difference or that some random engineer from an obscure website did a review and was very complimentary, but that is fairly typical of self-proclaimed videophiles, who much like their audiophile brethren like to equate price and exclusivity with performance and quality.


So if the boutique manufacturers are unable to compete by raising prices to offset their R&D costs, if they are unable to justify the much higher price of their products based upon name brand alone, or if the cost to develop their own in-house product is simply too expensive there is always another option.

This route involves reducing costs by letting someone else handle the actual R&D.  This is done a few different ways, but primarily it comes in the form of a company outsourcing their development and engineering, or in other cases a company may borrow (license) technology from other firms to use as a starting point for their own enhancements.

More than a decade ago I worked for a computer company called Gateway, and to many people Gateway was a PC manufacturer.  However, what most people didn’t know is that Gateway was essentially nothing more than a specifications company who assembled PCs.  Gateway didn’t manufacture motherboards or processors.  They didn’t build CD drives nor did they write device drivers.  Gateway didn’t even produce the metal cases the PCs were shipped in nor did they produce their own keyboards, mice, or speakers.

Each and every component of a Gateway PC came from another vendor who designed that component to meet the specifications that Gateway required.  So basically what Gateway did was purchase motherboards from one supplier, processors from another, cases from yet another, cables from this supplier, power supplies from that supplier, and cables and cd/dvd drives and software and hard drives and everything else from dozens upon dozens of suppliers.  They shipped all of these materials to a production facility where the parts were assembled into a case, software was loaded, the final PC was put into a box and it was ultimately shipped to the consumer.

That isn’t to say that Gateway didn’t have a hand in the design, because they worked with suppliers to design the cases and components and picked the features they wanted included or excluded.  They picked the colors and the styles and decided where the logo would be… but they never actually built the individual components.  In fact, some of the suppliers that Gateway used also supplied other PC manufacturers that were direct competitors to Gateway.  I worked in an engineering and testing lab and can still recall working with one of the suppliers (Tottori SANYO) on a new laptop design.  When we were presented the mockup of the laptop it was actually shipped to us with a Dell power brick.  The final production model (Gateway Solo 2100 for those interested) was practically identical to a laptop produced by Dell, and aside from the exterior plastics, BIOS screens, and the labels – it was in effect the same computer.  In fact, some of the removable components such as the CD-ROM drive or floppy drive were actually interchangeable between the Gateway and Dell systems.  

My point in all of this is that it isn’t unusual to a company to outsource some of their development.  They might dictate the specifications and they may customize numerous aspects of the final product, but in many cases they won’t actually handle the final design, engineering, or production of a component or even an entire unit.  In Gateway’s case, assembling a laptop was simply a matter of installing a processor, some memory, and a keyboard to match what the customer ordered, and much in the same way an electronics company might outsource the production of a CD changer or an amplifier assembly to a company that can produce that unit at a lower cost due to their production capacity.  

The Blatant Fraud  

As I have shown above, outsourcing isn’t unusual nor is it indicative of any nefarious behavior.  It is a common tactic used successfully across a variety of industries, so in theory it is nothing to be ashamed of.  In most cases companies that outsource do so in order to minimize costs or to leverage the expertise and intellectual property of another firm.  Then they incorporate the technology into their own products which are sold under their own label.  I completely understand why this happens.  I understand why there is a need for it, and I understand the efficiencies that can be gained by outsourcing.

What I cannot understand however, is outsourcing to a company and then essentially just taking their design – putting a new name on the front of it, and selling it at a price which is exponentially higher.    For instance, a few years ago an electronics company by the name of Lexicon was caught red handed rebadging an Oppo Blu-Ray player that retailed for $500 inside of their own aluminum enclosure which they then priced at $3,500!  Lexicon claims that it is “one of the world's premier manufacturers of home theater and professional electronics”, but does that claim justify them jacking up the price of a Blu-ray player by $3,000 (700%!) just because their nameplate was slapped on the front?  

Lexicon did try to claim they used the Oppo player and then in turn did some enhancements to it, but unfortunately for them, the experts at Audioholics not only disassembled both the Oppo and Lexicon players to verify they were identical inside, but they even took it a step further by performing detailed tests on the two devices to verify they were identical in both components as well as performance.  So in this case Lexicon was caught and their fraud was shown to the world, but how many consumers purchased a $3,500 Blu-ray player under the belief they were getting the best possible technology available to them only to be handed a $500 player inside of a $3,000 aluminum box?  

Obviously Lexicon isn’t alone here but they are one of the more egregious examples.  I don’t feel it is entirely unfair to call this type of behavior fraudulent, because there is clearly zero justification for the 700% increase in price which is one prime example why I would never do business from a company like Lexicon.  However if it were not for Lexicon’s pure laziness in this case, would anyone have really noticed?  If Lexicon would have had Oppo redesign the primary circuit board and if they would have rearranged the components (and perhaps even designed their own chassis instead of just using a stock Oppo design), chances are nobody would have ever realized they were the same product.

They also could have simply tweaked the Oppo design to add features or customize it in some small way by modifying the audio processor and claiming their own engineers simply built upon the existing Oppo platform. Sure many of us would still be skeptical, but at least they would have some small defense for their increase in price.  

In fact this type of behavior happens all the time. If you take the time to open up the cases of modern electronics, you often find circuit boards, power supplies, or other components which have been produced by third party companies, and often those components (with very minor changes) may appear in multiple different brand name products.  Many people are aware of Chinese electronics assembly companies like Foxconn who produce products for companies such as Apple, Acer, Dell, HP, Samsung, Sony, Vizio, Amazon, Microsoft, Nintendo, Toshiba, Motorola and many, many more. 

Other companies like Quanta Computer product products for several different PC companies from the exact same building so it isn’t a stretch to assume in some cases they share components or even assembly lines. This is why it pays to do research on products before purchasing them, and when possible it is always a good idea to do comparison testing with your own eyes and ears.  Even if you can afford to pay 200 or 300% more for the same product being sold under an exclusive name, with a bit of research and a dosage of skepticism, you won’t have to.