Higher End Audio Companies: How Do They Survive??

[Khorn]

It amazes me that there are so many companies dedicated to the manufacture of higher end as opposed to "mass market" products. The number of speaker manufacturers alone and the models they make is just staggering. I can't see how there is the customer base to support these companies and products.

There are many products that never come to worldwide or even nationwide attention. The ones we here about most are touted in the few specialty magazines left and on Internet.

It can be a rather daunting and perplexing experience trying to decide what to purchase. You all know that if you ask the question "what xxxx should I buy?" you'll get as many different opinions as replies.

I'm amazed that so many companies remain in business.

[Grant]

Wealthy audiophiles, collectors, and traders with money to burn buy all that prohibitively expensive gear. Reviewers write about it, and the rest of us just lust after it.

[Khorn]

Originally posted by Grant
Wealthy audiophiles, collectors, and traders with money to burn buy all that prohibitively expensive gear. Reviewers write about it, and the rest of us just lust after it.

I'm not just talking about the ultra expensive stuff Grant. If you look at just how many speaker companies and models they make its mind blowing. Even in the low-med price range who the heck buys all of these? The mass market buyers which are by far and away the majority, wouldn't even be familiar with the company names let alone ever walk into a store that sell these products.

In a way its a shame to a degree 'cause if you were to allocate even a relatively small amount to purchase a system you could end up buying either a very mediocre pile of equipment or a few pieces of very good sounding gear. In this end of the market you might be able to say "less is more" if you are educated in what you are buying. That last point is the problem though. Not many people take the time and trouble to research the field and therefore never really know what they could possibly get.

[-=Rudy=-]

It's too easy for someone to go into a Best Buy and crap whatever JBL or Bose Acoustimess system is on sale that day. For a modest increase in price (or in some cases even at the same price), you could go up to something like Polk, Boston, NHT.

However, those three are success stories. What about the dozens of others that never get that kind of recognition? In the late 70's, I went to my favorite local haunt, Absolute Sound, in the hopes of finding a new pair of speakers. For my junior high school budget, I could afford maybe $300/pair, tops. What my choices boiled down to were the Polk Monitor 7, and a Grafyx SP10. With a bit meatier bottom end (cleaner, lower), I went with the Grafyx. This company was out of Chicago, and I have a couple of reviews from the audiophile press that raved at how well these speakers performed. They kept the same product line for a few years, faltered, and then a new owner took over and completely changed the lineup. Basically, they just bought the name. That new edition never lasted long, and the company folded.

With both the Polk and the Grafyx getting the same amount of accolades in those days, why did Polk survive and Grafyx falter? Any number of things. Bad marketing? Possibly. But for each Polk, how many other little companies have come and gone? Quite a few.

I miss Audio magazine's annual equipment guide.

[Henry Love]

It amazes me too.But you don't have to worry,theres still plenty of rich people around.It seems though that a lot of the high end companies are getting into home theater.

[LeeS]

How do they survive?

1. There are a lot of audiophiles and music lovers - my trips to HE2001 and other American and European shows confirm this.

2. Profit margins are generally in the range of 40%.

3. These are small companies with low overhead and advertising costs in high end publications are less than major periodicals.

4. Most audiophiles are relationship driven/acquisitive and will come back for more product if treated right with customer service and reasonable pricing.

5. Many high end companies have direct via web offerings that lower business overhead.

6. Many in the business just love what they do - they are making money off a passion and hobby - what's better than that?

I am sure there are some others I missed.

:)

[Khorn]

One thing that I find really amazing is that in a 2002 Canadian Hi-Fi equipment guide there are about 100 different speaker manufacturers alone both imported and domestic. Many of these have 2 or more lines of speakers with many models in each line. These represent less than 50% of the manufacturers listed in the old "Audio Equipment Bible" and even that wasn't totally complete.

Now, in a country like Canada with about 30 million people at most, how many of these are audio conscious enough to buy something more than the mass marketed systems? Not that many I guess. Shure most of these companies export around the world including a lot to the USA but still for our country that is one heck of a lot of choice as far as speaker systems are concerned.

Just to put it in a bit more of a perspective. The same guide referred to above lists only 25 or so lines of TV's including all types such as rear and front projection AWA the regular direct view CRT TVs and, a lot of these are the same manufacturers under different Brand names. On an average one could safely assume that more people have a TV set than mid- to high end speaker systems yet the speaker make choice is probably in total maybe 300 brands worldwide if not more. Think of how crazy it would be if you had to pick from a few hundred different brands of TV. Not a pretty thought.

It sort of boggles the mind if you think about it too hard. OUCH! :D :D

[Taurus]

It's not THAT difficult to design a good sounding speaker. And while there are many loudspeaker system manufacturers, I'll bet the amount of raw loudspeaker (i.e. "drivers"--woofers, tweeters, etc.) manufacturers is much less. Ever notice how many loudspeaker companies use drivers from Scanspeak, Vifa, or Dynaudio? Lots! (high quality driver manufacturing is a specialty field).

[T]

[Ron Stone]

Sometimes you find out the company does other, related things that actually make steady money, be it installing sound systems on planes and boats, manufacturing a particular piece of surgical gear, or testing circuit boards for a military contractor.

[Gerry]

Those companies that survive tend to do so by being keeping the operation small, maximizing their margin, and convincing their affluent clientele (which includes, in relative terms, all of us) that the, essentially cosmetic, added value they supply justifies the cost. I think most would be surprised at how small most high-end manufacturers are. Few employ more than a small McDonalds would, most far fewer. I've dealt with cutting edge companies that employ fewer than a half-dozen people. Usually about half are sales and marketing types, there might be a couple of engineers (who probably also do the final assembly and all the testing), and maybe a clerk/accountant. Nobody's doping their own semiconductors here (few are even stuffing their own circuit boards); despite what the ads say, these are nearly all variations on well-known circuit topologies and off-the-shelf electronic/loudspeaker components. Cabinetry is generally the most expensive component of loudspeaker manufacture and, while the power transformer outprices the faceplate in most amplifier designs, I suspect that in the highest-end designs those positions are swapped (can you imagine what a Jeff Rowland faceplate must cost?).

I'm not sure where LeeS's 40% margin figure came from (the retail end, perhaps?) but , from what I've seen, that's a bit thin. Provided cosmetic expenditures are kept reasonable, all but the shortest run components should approach 100% (and I know that many achieve multiples of that). Keep in mind that the high-end is a very limited market and economies of scale never really start working for you so if you're going to turn a profit, you're going to do it via a substantial margin.

This is not to say that this is a scam; it isn't. We get what we want, beautiful looking and (usually) great sounding gear that we don't have to build ourselves. And if we get taken, it's our own fault.

[Ron Stone]

Gerry, I think LeeS is using the retail margin. I've always understood margin to reflect the amount of the total price that is mark-up. So something that is sold for twice what it costs has a 50% margin (not 100%).

The margin, however, should not be confused with profit. Margin does not take into account the expenses of running a business: employee salaries, rent and utilities, transportation, theft and damage, advertising, etc.

In all my years of retail, the highest margins were in housewares and domestics (curtains, bed sheets, cooking utensils, etc.) and women's clothing: things that had high brand name recognition. The lowest margins are in staple commodities like gasoline and groceries, and loss leaders that draw customers into a store, like newspapers and magazines . And despite their high price, CDs are also a low margin item, as are most mass-market electronics and computers.

I suspect that high-end audio would require higher margins, due to the lower inventory turnover. And the higher perceived value of brand names in that market would allow them to get that margin.

[LeeS]

"I'm not sure where LeeS's 40% margin figure came from (the retail end, perhaps?)"

I once worked in a stereo store and developed the sales commission system. This was universally the typical margin - much more for cables, 20% generally for video equipment.

Shhh...don't let any of these trade secrets out. :)

[LeeS]

"that the, essentially cosmetic, added value they supply justifies the cost"

This is pure bunk - there is a lot of variation in circuit design and sonic quality among the high end and I have always found you generally get what you pay for with the established high end gear makers.

A lot of the cost of (say take my Audio Research gear as an example) making a high end product is the skilled labor. Tube designers and assemblers that do quality work do not grow on trees! Also, there is often a tremendous amount of R&D involved and limited supply parts. There are specialty cap, resistors, power supplies (many created internally), quality wiring, warranty service costs, branding costs, marketing expenses, specially sourced and matched tubes, etc.

In many cases, I have recently been surprised by a small high end firm's ability to create great sounding entry level product based on uber-expensive flagship technology. You don't get these things from mid-fi brands.

It is a complete disservice to imply that high end products are offering little more than cosmetic improvement.

[chrischross]

Originally posted by Khorn
One thing that I find really amazing is that in a 2002 Canadian Hi-Fi equipment guide there are about 100 different speaker manufacturers alone both imported and domestic. Many of these have 2 or more lines of speakers with many models in each line. These represent less than 50% of the manufacturers listed in the old "Audio Equipment Bible" and even that wasn't totally complete.

Now, in a country like Canada with about 30 million people at most, how many of these are audio conscious enough to buy something more than the mass marketed systems? Not that many I guess. Shure most of these companies export around the world including a lot to the USA but still for our country that is one heck of a lot of choice as far as speaker systems are concerned.

Just to put it in a bit more of a perspective. The same guide referred to above lists only 25 or so lines of TV's including all types such as rear and front projection AWA the regular direct view CRT TVs and, a lot of these are the same manufacturers under different Brand names. On an average one could safely assume that more people have a TV set than mid- to high end speaker systems yet the speaker make choice is probably in total maybe 300 brands worldwide if not more. Think of how crazy it would be if you had to pick from a few hundred different brands of TV. Not a pretty thought.

It sort of boggles the mind if you think about it too hard. OUCH! :D :D

IIRC -- the Canadian government provided some seed money for R&D labs for speaker companies. This was targeted as a export market that Canada could do well in -- and they certainly have my money. Canadian companies seem to be very astute with their pricing, have solid entry-level audiophile models on up to state of the art packages.

Great speakers, fair pricing. Go Canada!!

[Khorn]

Originally posted by chrischross


IIRC -- the Canadian government provided some seed money for R&D labs for speaker companies. This was targeted as a export market that Canada could do well in -- and they certainly have my money. Canadian companies seem to be very astute with their pricing, have solid entry-level audiophile models on up to state of the art packages.

Great speakers, fair pricing. Go Canada!!

The work was done by the National Research Council that set up facilities in Ottawa Canada. These included an extremely advanced anechoic chamber. The effort was headed by Dr. Floyd Toole who subsequently took over the JBL speaker division (and maybe more) of Harmon in California.

Many companies both Canadian and American developed/tested their speaker designs at the NRC facility.

[Uncle Al]

Originally posted by LeeS
"that the, essentially cosmetic, added value they supply justifies the cost"

This is pure bunk - there is a lot of variation in circuit design and sonic quality among the high end and I have always found you generally get what you pay for with the established high end gear makers.

A lot of the cost of (say take my Audio Research gear as an example) making a high end product is the skilled labor. Tube designers and assemblers that do quality work do not grow on trees! Also, there is often a tremendous amount of R&D involved and limited supply parts. There are specialty cap, resistors, power supplies (many created internally), quality wiring, warranty service costs, branding costs, marketing expenses, specially sourced and matched tubes, etc.

In many cases, I have recently been surprised by a small high end firm's ability to create great sounding entry level product based on uber-expensive flagship technology. You don't get these things from mid-fi brands.

It is a complete disservice to imply that high end products are offering little more than cosmetic improvement.

I agree with you Lee - but I think the overall emphasis of Gerry's post (aside from the quoted snippet) was that they are (mostly) not manufacturing their own electronics. No doubt that the high end is designed, assembled and engineered by talented people. People that will test and re-test to ensure the electronics installed produce the desired result. People that will agonize over every component in the chain and make no compromises. People that will assure every connection is made properly.

And ensure that the package is as aesthetically pleasing as is warranted by the pricey purchase.

[MagicAlex]

This thread reminds me of how grateful Audio Fidelity has been to offer Steve's great works at a much lower price than other high-end SACD producers. Thanks guys! :thumbsup:

[Gerry]

"I've always understood margin to reflect the amount of the total price that is mark-up." (Ron Stone)

Ron, you are absolutely correct. For whatever reason, I crossed up my terms; I should have said mark-up.

"The margin, however, should not be confused with profit. Margin does not take into account the expenses of running a business: employee salaries, rent and utilities, transportation, theft and damage, advertising, etc. "

This is my point exactly. Since even the largest high-end companies are, in manufacturing terms, minuscule, these expenses have to be covered by means of a substantial markup on individual units. They cannot approach the volume necessary to take advantage of any sort of economies of scale. There might be exceptions, Mark Levinson and Revel, for example, have Harman money behind them so they can more easily amortize engineering and materials costs. But, longer leash notwithstanding, they still have to turn a profit as a division.

"In many cases, I have recently been surprised by a small high end firm's ability to create great sounding entry level product based on uber-expensive flagship technology." (LeeS)

What does this mean to you Lee? Since these companies can't afford to take a loss by incorporating truly "uber-expensive flagship technology" in lower priced, entry-level products, it seems clear that the technology isn't what is driving the unit cost here; but rather that technology's implementation (and, of course, the necessary markup). If you had access to schematics you'd find that there are relatively few unique topologies available for audio designers. Certain designers may beef up particular parts in their design (multiple cascaded regulation stages, for example), but it will still fall into one of a few well-documented and (usually) time-honored topologies .

" A lot of the cost of (say take my Audio Research gear as an example) making a high end product is the skilled labor. Tube designers and assemblers that do quality work do not grow on trees! "

Design costs would have to come out of the mark-up and while reasonable diligence and attention to detail are required of assemblers, good solder joints don't require college degrees or journeyman electricians. These people do still need to be paid and benefitted appropriately, however.

"There are specialty cap, resistors, power supplies (many created internally), quality wiring...specially sourced and matched tubes, etc. "

While there is a significant cost jump between typical consumer-grade and higher-quality parts, once you've bitten the bullet and committed to the toroidal transformer over of the laminar unit, the cost increases incurred by spec-ing a higher quality toroid become relatively incremental. The same is true of things like output devices, filter caps, and so on.

"...branding costs..."
This is partly marketing and it's more important than most people seem to realize, and more expensive. Included here, is the added value that I previously referred to as "largely cosmetic." The customer expects a high-end product to look like a high-end product and, since these are luxury purchases, they expect to be treated in a certain way. The metalwork, woodwork, and personal attention necessary to achieve this are a significant drain on a small company, both in terms of unit cost and operating overhead. Done properly, though, branding can allow the manufacturer to actually raise the perceived value of the product, allowing them to increase the markup.

I do not claim these products don't outperform their mid-fi/low-fi/Best Buy counterparts. They do. But a five-figure pricetag does not necessarily relate directly to the component's parts list.

[LeeS]

"that they are (mostly) not manufacturing their own electronics"

This is not true either as most established high end companies DO make their own gear.

Audio Research, Cardas for cabling, Avalon, Wilson, C-J, the list goes on and on...

"If you had access to schematics you'd find that there are relatively few unique topologies available for audio designers."

Having worked on a new audio company recently, I don't believe this either. There are infinite variations of circuit design and infinite variations of implementations, as well as infinite way to build speaker cabinets and improve any part's quality.

"While there is a significant cost jump between typical consumer-grade and higher-quality parts, once you've bitten the bullet and committed to the toroidal transformer over of the laminar unit, the cost increases incurred by spec-ing a higher quality toroid become relatively incremental. The same is true of things like output devices, filter caps, and so on."

Not true because taken in bulk there can be a multiple cost increase which then gets a 40% margin added on so the end user price can grow rapidly. There are some exceptions but by and large I find a lot of the reasonably priced high end stuff to be of very good value.

"But a five-figure pricetag does not necessarily relate directly to the component's parts list."

I think it does overall. There certainly are laws of diminishing marginal returns once one hits 10-15K IMHO but extra profits are not bad for high end either as these often get reinvested in newer, better sounding designs.