Networking, Not Video, Emerging As CEDIA Industry’s Go-To Category

Five years after a collapsing housing market ransacked the fortunes of the residential custom electronics industry, AV integrators and their trade organization, CEDIA, are still correcting for a vastly different business environment as the industry arrives in Denver this week for the annual CEDIA Expo. Those who have adapted -- in some cases going under before rising from the ashes -- are pinning hopes on new technologies, a slice of the commercial market, smarter business practices and IT chops to lead them into the next chapter of custom electronics.

"It’s obviously not as easy as it used to be for any of us,” Will Pisula, general manager of Encore Audio/Video, Portland, Ore., told Consumer Electronics Daily. Homebuilding “is way down,” he said, and that includes second-home construction done by CEDIA’s traditional customer base of “affluent Americans.” To survive, integrators today need to be “more open-minded and look for as many opportunities as you can through traditional and nontraditional channels,” he said.

In the glory days of custom, CEDIA installers could be satisfied with selling a home theater that delivered fat margins on high five- and even six-figure tickets. “We no longer have that luxury,” Pisula said. When selling a projector or flagship flat-panel TV today, integrators need to design in automated shades, surveillance cameras, acoustic treatments, furniture and seating and “not leave any money on the table,” he said.

That’s a far cry from the days when $25,000 plasma TVs debuted through the CEDIA channel and customers happily paid premium tags to be among the first to mount a TV to the wall. Today consumers can pick up a 50-inch flat-panel TV for under $500 at the grocery store. The worst thing that happened to the TV market was putting flat-screen TVs in big box retail stores, “and even worse, in the Targets, Walmarts and Costcos,” Pisula said, where high-profile discounting marked “the beginning of the end” of TVs as a profit center. Margins dropped rapidly to keep up with demand for new features, “and there was really no way for anybody to be profitable,” he said. Aside from a few high-end front projector makers, no one is making money from video alone, he said. Encore needs to upsell a customer with soundbar, receiver, warranty, cabling and a mount -- along with labor -- to make video pay off. Without the add-ons, “We can’t make money even at the upper echelon,” he said.

The video decline took the fun out of specialty retailing for Randy Wilson, an early CEDIA member and one of the first AV specialty dealers to promote the concept of high-end custom home theater in the early 1990s. Wilson had an easy target in the Los Angeles area with clients from the TV and film industries eager to install theater-grade systems in their homes, and it meshed with his own passion for high end audio and video. At the time, home theater gave Wilson and other AV specialty retailers a way to branch out when interest in audio-only systems started to wane. Wilson changed his sign from Wilson Audio Video Entertainment to Wilson Home Theater to align with the emerging trend and boasted “the best theater in L.A.” a $75,000 demo system that he sold many times over. “It became a very, very viable business,” Wilson said. “We offered something different that the whole family could enjoy."

Companies like Runco put home theater “on the map,” Wilson said, and Lutron and Crestron provided a way to automate lighting and the assorted gear required to make a home theater operate smoothly at the touch of a button. “People looked at us not as a retail store but as a service provider, more like an architect or designer,” Wilson said. His store easily sold projectors ranging from $12,000-$60,000. Today, performance advances at the value end make pricey projectors a much tougher sell. “Compare a $5,000 projector to a $60,000 one, and you might be able to see a difference,” he said.

The advances in lower cost product combined with widespread Internet sales of once-protected lines led Wilson to rethink the business. His store at one time had an exclusive on lines such as Runco and McIntosh, and now “you can get [premium products] anywhere,” he said. Manufacturers have been trying to hold the line and maintain exclusive distribution, “but it’s over,” Wilson said. “Once I realized [that], it was like, what’s the point?” he said. “Burned out,” Wilson ceased operations a year ago. He joined Gefen Systems earlier this year as director of marketing. “I'm using a new part of my brain, and it’s creative and fun,” he said.

Jon Myer, president of MyerConnex, Gaithersburg, Md., sees business differently today, too. The former president of Myer-Emco -- the specialty AV chain that Myer’s father founded in 1955 -- is running a custom-only operation and enjoying a quality of life that had long disappeared when he oversaw the 10-store Myer-Emco chain that shuttered in 2010, he said. While Myer-Emco did more than $15 million annually in custom business, “it wasn’t true high-end integration, which is what we're doing now,” Myer said. The Washington, D.C.-area chain took a hard hit when margins collapsed in the video market and the economy slumped.

Overhead costs have plummeted for Myer in his new business, which doesn’t have a showroom. Inventory turns are no longer part of Myer’s vocabulary because “I turn it instantly,” he said. Myer-Emco’s monthly rent was $258,000 for its stores and corporate office, and the chain carried $4 million worth of inventory it had to turn to make a profit, Myer said. MyerConnex’s rent, by contrast, is $3,000 and the company carries $20,000 in inventory a month. Without specific lines he has to clear out of inventory, he’s free to tell clients he can get them “whatever products they want.” The risk-reward ratio between the two business models is “night and day,” he said.

Myer is no longer playing the frustrating “one-step forward, two steps back video game” of retailing, he said. Like many dealers bitter about the video decline, he said TV manufacturers would give Myer-Emco a price that had some profit margin, and then he'd Google a model to find “they're all over the Internet below my cost,” he said. Where Myer-Emco treated labor as a “necessary evil to sell boxes,” labor fees are now a profit center at MyerConnex, he said. And the company has become selective about which jobs it takes. “We've fired potential clients because we knew going in it wasn’t going to be a good job for us,” Myer said.

Cheap TVs and the devaluation of audio and video have transformed a business that many CE integrators got into in the 1970s and 1980s out of passion for home entertainment. Many consumers aren’t willing to pay for premium electronics in the way they used to, dealers told us. Myer cited a well-to-do client with a dated $30,000 AV system that he proposed to upgrade with newer gear for $28,000. The client wasn’t interested in an electronics refresh, but he was willing to pay $9,000 for an outdoor couch. “It wasn’t whether he could afford it,” Myer said. “It was about mindset.” The first thing a client does today is check TV prices when they get a system proposal to determine whether the integrator’s price is “at market,” he said. TV has “set the price standard” for an overall drop-off in perceived value of consumer electronics, Myer said.

Encore’s Pisula referred to a general “lowering of consumer expectations” when it comes to most of the core competencies of the CEDIA channel. “I don’t know when it became that easy and cheap,” he said of consumers’ perception of audio and video. Listening to heavily compressed digital music through a $5 set of earbuds is acceptable to many people now, he said. For someone who makes a living from selling a premium entertainment experience, Pisula called it “concerning” that experiencing a movie on family night on a $400-$500 TV through a soundbar is “adequate” for most people. The number of men under 40 who have never visited a hi-fi store compared with the number 30 years ago is “absolutely frightening,” he said. One of the biggest challenges the CE industry will have over the next few years is raising the general public’s awareness “that there’s something better than mediocre or subpar,” Pisula said. People are “clearly settling for that time and time again."

That’s part of an overall shift in cultural trends, said Charles O'Meara, former owner of Absolute Sound, Winter Park, Fla., which closed shop in 2010 when the business downturn and an expensive showroom overhaul created a “perfect storm” that forced the 31-year-old business to fold (CED Sept. 10/10 p1). “Music used to be a social thing” among teens and young adults, O'Meara said. When they grew up they made home theater a social experience, he said. “Now music is a very personal thing through headphones, and quality doesn’t matter."

Before the devaluation of electronics set in and the economy sank, the custom electronics business rode the wave of the lax mortgage business. Integrators would spec in pricey electronics, and standard business practice was for customers to roll the electronics into their mortgages. But “the thing that really took down integrators’ ability to shoot fish in a barrel” was the demise of the home equity loan, said Eric Bodley, a charter CEDIA member who headed custom electronics for Florida retail chain Sound Advice in the early 1990s. Aspirational customers borrowed against the value of their homes, which they saw as a way to reinvest in their homes, Bodley told us. When the upper middle class could have and own what the rich could afford, “that was a huge boon for the industry."

'Curse’ of Being CEDIA President

Bodley’s path in the CEDIA world is typical of the road others traveled as the industry grew up. In 1995, during heady times in custom installation, Bodley co-founded Florida Home Entertainment Design, which folded in 2003 due to family health issues among key employees and financial repercussions from the Enron debacle that made two clients put major projects on hold. A former CEDIA president, Bodley quipped about the “curse of being CEDIA president,” since so many integrators who held the title over the years have gone out of business. Bodley went on to consult for the custom market and developed a widely used training program for AV integrators. He continues to consult integrators and is general manager of cable manufacturer Perfect Path, a member of the Azione Unlimited buying group.

While new home construction once offered easy money for CEDIA installers, that business hasn’t recovered. The National Association of Home Builders said builder confidence is at its highest level in nearly eight years, but that isn’t translating to the kind of AV business integrators once knew, industry experts said. Bodley’s dealers said most builders “just want to get the home built and done.” If the customer wants to do AV or home automation, it’s now an after-the-fact decision “that’s their business,” he said. It’s been “incredibly hard” to create a high-end AV package for a builder since 2008-09 when “the industry took it on the chin,” he said.

Advances in wireless technology have been part of that trend, allowing consumers to get into control of lighting, thermostats, security cameras and AV without having to wire a home for it during construction. Former Absolute Sound owner O'Meara tours model homes in Florida regularly and said, “There isn’t a builder that doesn’t have some kind of rudimentary AV package.” Typically, they use Apple products, which consumers already own, to control the gear, he said. “It’s easy and inexpensive,” O'Meara said. “Good enough really is good enough today,” he said. O'Meara has taken on a consulting role at Acoustiblok, which sells acoustical treatments for controlling room reflections and sound leakage, the kind of specialty solution a custom dealer can offer clients that doesn’t lend itself to price comparisons on a smartphone app.

Apps and smart devices for the iPhone and iPad have taken a huge toll on the high-end home control business once reigned over by Crestron and others. Arriving two years after the economic downturn, the iPad caused a paradigm shift in the residential control business, said Franklin Karp, chief operating officer of Audio Video Systems, Plainview, N.Y. “All of a sudden people were questioning a lot of expenditures,” said Karp, including why they needed a $2,400 touch panel when they could control gear from apps on their iPad.

The “value proposition shifted,” Karp said. After the economy made customers spend more rationally, “it wasn’t as easy to go and sell big expensive system when there were perceptions that the value wasn’t there,” Karp said. There were also “legitimate, less expensive alternatives,” he said. That marked the first time integrators saw that “even the richest guys were nervous,” and it was a wakeup call for integrators who had never experienced lean times. “Clients started second-guessing expenditures, or slowing down or asking for discounts,” he said.

Sonos’s multi-room music system benefited from that changing mindset and the shift to wireless technology, Karp noted. As a wireless multi-room music system that doesn’t require labor-intensive cabling or installed keypads, Sonos has had “a bigger impact on multi-room audio than any other product,” Karp said, because it’s a relatively low-cost solution with little margin. The simple and reliable audio solution caused many installation companies to rethink how they approached whole-house audio and “a lot of them adapted,” he said.

Karp, former president of the once-prominent Harvey Electronics retail operation in New York, still holds out hope that audio will once again be a solid profit source for the custom electronics market. During the first 15-20 years of the custom industry, control took center stage, but now Karp is looking to audio -- “the one constant” -- to replace some of the business that’s been lost in on the control side. Custom integrators “lost sight of quality audio” including high-performance amplifiers and speakers, instead opting to sell 30 pairs of mediocre in-wall speakers in a large project and functional 12-channel amplifiers to power them, he said.

Upselling consumers to better amplifiers and speakers -- and to robust networks to support streaming media -- is “another opportunity” for integrators today, he said. He hopes CEA’s recent announcement of expanded support for high-end audio bears fruit. Bodley of Perfect Path said two-channel music is a hobby that’s “not only surviving but thriving,” and it offers CEDIA dealers a way to introduce their clients to step-up audio. “Technology is always going to grow at a faster rate than the consumer’s ability to absorb it,” he said. Integrators can provide the consultative sell to help customers sort through the premium audio options and benefits, he said.

Ironically, audio could be one of the tickets to selling customers a step-up network, the newest area of focus for the industry. Putting in higher grade networks with higher security, speed and reliability than mainstream routers deliver offers integrators a way to differentiate and support the needs of an upscale home with a growing array of connected devices. “If you don’t have an IT department, you're fooling yourself because the network is key today,” Karp said.

Commercial-grade networks also offer a way for custom integrators to set themselves apart from the home automation systems starting to roll out from Goliaths including AT&T, Comcast, Verizon and ADT, as they add control of lighting, AV, HVAC and appliances to their service packages. Pisula of Encore referred to a “commoditization of automation services” by telecom providers and big box retailers such a Lowe’s with its Iris line of connected home modules that work over ZigBee, Z-Wave and Wi-Fi. The big companies are offering simple levels of automation -- lighting, HVAC, surveillance cameras and an alarm system -- “and they're marketing them in a way that our industry can’t be competitive with,” he said.

Successful integrators will ride the coattails of AT&T and Comcast marketing, and sell customers on more robust offerings, Pisula said. “Our industry has more than a decade of experience deploying this type of technology,” he said, and integrators can upsell customers on network reliability and security, for starters. A lot of the do-it-yourself home automation systems “have almost no encryption,” he said. And sub-contractors hired by the telecoms haven’t received the in-depth training and leadership that CEDIA-level integrators have amassed over the years “to know what works and doesn’t work, he said. Home automation is new for the telecoms and their installers so “they don’t know what they don’t know yet,” he said.

'A Few Years to Retool'

CEDIA itself is pushing integrators to move into networks, as much a survival tactic for the organization as for its dealer members. “CEDIA has made an educational turn,” Don Gilpin, executive director, told us. After the economic downturn, “It took us a few years to retool,” Gilpin said. CEDIA is geared more to future trends of the industry and “shying away” from traditional categories such as home theater and lighting control, “although they're still important components,” he said. Home networking tops the list, and CEDIA has developed “a very popular curriculum” for dealer education, he said.

CEDIA as a trade organization had to do something. Integrators had started to complain that the organization was no longer relevant. One source said CEDIA “rode the coattails of a thriving economy, which fed an industry that didn’t know it was in trouble until 2008.” Buying groups such as Azione and Home Technology Specialists of America offer business management courses to their members and are providing much-needed marketing support to integrators. Webinars have largely replaced the need for in-person training, and there’s just so much time integrators can spend away from their businesses for industry events, they said.

Many dealers have the technical side of installation mastered “but don’t have the solid business skills to have a sustainable business,” said Encore’s Pisula. They got by in boom times when customers came through the door with a set of construction plans, but those days are over, he said. “If you're not efficient and don’t know the metrics of where you're succeeding and how you need to improve, I don’t see how you're going to make it,” he said, adding “that’s where most integrators are now.”

Vendor support for the CEDIA market has waned, too, sources said. “It’s very telling” that most of the large video vendors weren’t on the floor at CEDIA Expo last year, said Karp of AudioVideo Systems. “No one custom installation house is that significant to video vendors, but collectively we still represent a lot of business and want to sell the most expensive models that vendors make,” Karp said. For TV manufacturers to think Expo is not worth their time and money is a problem because a lot of dealers who feel they have to go to CEDIA’s show don’t go to CES, he said.

But that may be changing as well, presenting another threat to CEDIA’s long-term viability. CEDIA’s primary value to dealers is the annual trade show that allows manufacturers to reach their primary audience, said Tom Doherty, owner of Doherty Design Group, Indianapolis. But “CES has become relevant again,” he said. Doherty, CEDIA co-founder and president from 1990-1992, cited the specialty audio section at the Venetian hotel as an example of a CES offering that’s highly relevant to custom integrators. “Manufacturers only have so much money; how many trade shows can people support?” Doherty said.

Attendance at CEDIA Expo continues to shrink, Doherty noted, and he’s concerned the trade group will go the way of the Professional Audio/Video Retailers’ Association, which was absorbed into CEA. The organization’s budget is half of what it once was, Doherty said, while expenses haven’t changed. CEDIA co-owns the IBC show in Amsterdam with InfoComm, and that has been a “money train” for the organization that has funded U.S. operations, he said. But “CEDIA hasn’t generated one dollar for me as a business,” Doherty said. “Its primary value is an annual trade show where manufacturers can reach a target audience.” Things CEDIA could do to be more meaningful to dealers? Create a CEDIA-branded product line that could prop up margins and bring more of a commercial focus into the organization since many members are doing more of that business, he said.

Gilpin told us CEDIA is adapting to changes in the industry and that members are responding. Prior to 2008, CEDIA members “were drinking from a fire hydrant,” he said of the robust economy. Members and exhibitors “came flooding in,” and the most important benefit the organization offered was “help with shipping.” After 2008, it was clear the organization had to come up with ways to help dealers manage their bottom lines, Gilpin said. The organization has helped members with reduced credit card processing and check fees as an example, he said.

New member additions are coming at a brisk clip, Gilpin said. The group has added 600 new members worldwide this year, and retention is “back up to” 2008 levels of 82 percent, he said. Of CEDIA’s 2,152 member companies -- including integrators, manufacturers, distributors and reps -- 1,672 are in the U.S., he said. That compares with the 2008 “high-water mark” membership when the organization tallied 3,619 members, Gilpin said. At that time, the U.S. installer count was 2,683 vs. a current count of 1,173. Gilpin expects an additional 100-150 integrator members to come on board by year end.

Education is a top priority for CEDIA now, Gilpin said, and the home network is the focus. “The network is the heart of electronics systems in the home,” Gilpin said. CEDIA needs to train tens of thousands of integrators to be “the physician of the home network” and be able to integrate multiple systems into one logical network, he said.

CEDIA’s current mantra -- “own the network, own the home” -- is “dead on,” said Doherty, who is on a CEDIA advisory committee that meets during the Expo. If the organization were only focused on that one goal, it would be a solid step forward, he said. “We generated enough money and power that there could be so many initiatives out there,” he said. It’s key for CEDIA to focus on a single message, and Doherty believes “own the home, own the network” is it.

Gilpin is encouraged by progress CEDIA has made in education and an online resource library that will be unveiled early next year. The library is part of an initiative to make CEDIA “the voice of authority” in the custom industry. A year from now 180 hours of content will be available 24/7 online to anyone around the world. Part of the curriculum will be dedicated to home networking and emerging technologies, he said. The library will house the white papers CEDIA has written over the years, and the organization is working with CEA and InfoComm on codes and standards that will be published on the site, too, he said. CEDIA also hopes to offer online manufacturer product training as well, he said. The goal is to be “the place” for the CE, lighting, cable, security industries to go for information related to the home, he said.