What You Need to Know About This Dangerous Industry

Low demand for televisions is killing manufacturers.

For the past few months, LCD TV prices have been falling at a very fast rate. According to research firm iSuppli, LCD panel prices fell by around 4% in September 2011, and even lower in November 2011. With shrinking margins and decreasing profit levels, LCD panel makers are stuck between a rock and a hard place.

The horror!
Japanese conglomerate Sony (NYS: SNE) suffered a loss of $349.9 million, its third consecutive quarterly loss due to low sales of its LCD TVs. The electronics giant warned investors about a loss for the fourth consecutive year, as it lost a jaw-dropping $2.2 billion in its television business alone.

That was the last straw. Having seen enough of red, Sony decided to end its joint venture with Samsung in manufacturing LCD TVs and sold its entire stake to its partner for an equivalent of $940 million.

Besides Sony, Panasonic also tasted losses in its third consecutive quarter amounting to $1.3 billion due to asset writedowns amounting to $1.8 billion. LG Display, the LCD panel maker, is going through rough times as well, having reported losses amounting to $580 million in the third quarter.

Television retailers haven't been in much better shape. Best Buy's (NYS: BBY) third-quarter earnings dropped 29%, partly due to deep discounts it offered on televisions and other electronic equipment. Best Buy, like other bricks-and-mortar stores, is also facing the heat from online retailers such as Amazon, Wal-Mart, and eBay. Stores are turning into mere showrooms for customers who enter just to check out the products and then buy them online.

So what's causing the bloodbath in the LCD space?

First, an increase in manufacturing capacity has led to the oversupply of televisions, causing prices to fall. Secondly, the already weak demand situation worsened due to poor economic conditions. But these developments aren't deterring the technology giants.

Google, Apple hungry for TV pie
Rumor has it that Apple (NAS: AAPL) , still an unlikely competitor in the television space, would introduce its very own television set in the second or third quarter of 2012. However, Apple's attempt to come out with a television set top box, which it was not too serious about, managed to capture one-third of the market. If Apple takes on the television space on a more serious note, it could very well mean stormier weather for the existing players.

Google (NAS: GOOG) , on the other hand, has already taken a leap with the Google TV interface. In October, the company introduced the second version, which includes apps that viewers can use to search for websites, for shows from Amazon's instant video service, for movies with the help of Netflix, and even for live concerts. Nevertheless, whether all these frills would entice customers is yet to be seen.

So what's in store for the future?
Even after witnessing the carnage in 2011, research firm DisplaySearch believes that price drops for LCD TVs would be less pronounced in 2012. While LED TV prices would continue to fall, ordinary LCD TVs could witness stabilization in prices or even a gradual increase by the second half of 2012. Nevertheless, I fail to derive any comfort from this as the prices of the newer LED TVs might go south in the same way as LCDs. This, in turn, could continue to put pressure on manufacturers as they shift toward making more LED TVs to cash in on the premium price they attract.

The Foolish take
Poor demand coupled with cutthroat competition will definitely see television makers scramble to cut costs in order to shore up revenues. While the outlook for the U.S. seems to have brightened lately, the eurozone debt crisis continues to negatively influence emerging market economies. Therefore, television manufacturers may continue to face the heat; however, if analysts are to be believed, price drops might be less significant by the second half of 2012. Even then, I'd prefer to stay away from this sector for the time being.

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At the time thisarticle was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Best Buy, Apple, Google, Amazon.com, and Wal-Mart Stores.Motley Fool newsletter serviceshave recommended buying shares of Apple, Wal-Mart Stores, Google, eBay, and Amazon.com. Motley Fool newsletter serviceshave recommended writing covered calls in Best Buy.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Wal-Mart Stores.Motley Fool newsletter serviceshave recommended writing puts in eBay. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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