OCTOBER 4, 2006

News Analysis

By Arik Hesseldahl

Big-TV Battle: LCD vs. Plasma

Dropping prices on large-screen sets mean viewing pleasure for consumers who buy early—and thin margins for manufacturers

Christmas is coming, and that means war.

The battlefield? Your local consumer electronics retailer. The combatants? The companies that manufacture LCD and plasma screen TVs. The stakes? Bragging rights, maybe—because at least in the near term, there aren't going to be many profits.

"CATCHING UP." "The only ones making money in the TV business this year will be the guys who deliver the sets and the people who sell the stands and the mounting brackets," says analyst Rosemary Abowd of Pacific Media Associates in Menlo Park, Calif.

The imminent price war will pit so-called liquid-crystal display (LCD) screens against plasma screens, with consumers reaping the primary benefit. For the first time, LCD TVs in sizes above 40 inches are priced competitively and in some cases far lower than plasma screens in the same size. And sales volume for both types is expected to surge this year. That augurs a market where buyers will have a lot of choice and vendors race to undercut each other.

"It used to be that the market above 40 inches was a safe haven for the plasma business, but now the LCD guys are catching up and can compete at those sizes," says Paul Semenza, analyst at market research firm iSuppli in San Jose, Calif. "Before this, the LCD companies couldn't make their screens efficiently enough."

SALES SURGE PREDICTED. Why the progress? Think of it as Moore's Law turned on its head. Computer chips become progressively smaller or more powerful over time. But, in the case of LCDs, it gets cheaper to make them bigger. LCD manufacturers have reached a point where they can create six or more large screens from a single piece of glass. "Once you get going, the marginal cost of making each glass panel for an LCD screen falls a lot faster than it does for a plasma screen," says Semenza.

The upshot: a land grab that draws in players across Asia, from South Korea's Samsung and LG.Phillips, a joint venture of South Korea's LG Electronics and Dutch electronics giant Philips (PHG ), to Sharp and Sony (SNE ) of Japan, to Taiwanese players such as AU Optronics and Chi Mei Optronics.

Semenza says iSuppli is forecasting huge growth for both types of TV sets by the end of the year. Sales of LCD sets of all sizes should grow from 20 million units last year to 38 million this year. Plasma sets, meanwhile will grow at a comparable clip, from 5.2 million units last year to 8.6 million this year.

INVENTORY SQUEEZE. With the market growing so fast, aggressive price cutting is the word of the day, Abowd says. "We're seeing sets in the stores in the 37- to 42-inch range priced well below $2,000," she says. "And I'm seeing 37-inch SyntaxBrillian (BRLC ) screens for less than $1,000. This means there's not a lot of margin anywhere for anyone."

The average street price for a screen in the 30- to 34-inch range that sold for $1,161 in August, will drop to $1,050 by December, while the price for screens in the 40- to 44-inch range will drop a little more slowly, from $2,087 in August to $1,900 in December, Abowd says.

And while all this price cutting is generally good for consumers, it has its downside, too, she says. "For the past three years, as we've watched the market leading up to the holiday season, we've seen prices start to go up in late October and into November and December," she says. "There's certainly going to be some inventory constraints, and they'll be on the cheapest sets." Translation: If a big LCD or plasma screen is on your Christmas list, buy it early, or be prepared to rewrite your wish list.