The Upward Price Spiral

On January 5, 2011, I was flying to Las Vegas for the Consumer Electronics Show (footnote 1). On January 5, 1914, Henry Ford announced that he would pay a minimum of $5 to eligible employees who worked an eight-hour day. (At that time, a good wage was $2.50 for a workday of 10 hours.) Ford was not being altruistic; he wanted to motivate his employees both to become more productive and to stay loyal to their employer. And there were strings attached: A Ford employee “must show himself to be sober, saving, steady, industrious and must satisfy . . . staff that his money will not be wasted in riotous living.” But Ford also wanted his workers to be able to afford the products they made. It was Ford’s action, I believe, that triggered the rise of the American middle class, and it was that middle class’s combination of disposable income and increased leisure time that fueled the growth of high-end audio.

I was thinking of Henry Ford three years ago, when I returned from the 2008 CES. As reported in this space in March 2008, audio retailers I spoke to at that time were concerned that high-end audio sales would be adversely affected by the ongoing impoverishment of the middle class. And that is what subsequently happened, though the conjoined worlds of home theater and custom installation suffered a much greater relative drop in sales in 2008 and 2009 than two-channel audio, as the drying up of home-equity loans to finance big-ticket home theater sales was accompanied by a virtual cessation of new-home construction.

And I was thinking of Ford again when I returned from the 2011 CES. The 2011 Show featured an extraordinarily large number of very expensive loudspeakers. (You can find our coverage here.) Two decades ago, there was just the Wilson Audio WAMM in lonely splendor in the >$100,000/pair category. Now there are, if not dozens, still so many “statement” speakers that I need all my fingers and most of my toes to count them. Who is buying these products? I am safe in stating that it is not middle-class audiophiles like you or me.

On the flight to CES I was catching up on my reading, including an article in the November 27 New York Times, “Some Very Creative Economic Fix-Its,” by Davis Segal, in which New York University economics professor Andrew Caplin explained that the global economy is morphing into a “cater to the rich” model. According to Caplin, growing inequality will now be a fact of life in the US, and the middle class would do best by trying to “understand the needs” of the wealthy and attempting to provide services to meet their demands. This echoes a sentiment expressed by newly elected senator Rand Paul (R-KY). “We’re all interconnected in this economy,” he told CNN’s Wolf Blitzer on November 2. “We all either work for rich people or sell stuff to rich people.”

When you couple the explosion of the availability of six-figure audio components with the facts that the luxury-car business is seeing increasing sales—a news item in the January 22 issue of The Economist (which included several articles on income inequality in the US) reported that Rolls-Royce has doubled its annual sales every year since 2007—and that the luxury pen and watch markets are also growing substantially (footnote 2), it would seem that Professor Caplin and Senator Paul have a point.

If you, as an audio manufacturer or retailer, have to gross a certain amount of revenue each quarter to cover your fixed expenses and enable you to meet your payroll, you have three choices of how to do it: 1) sell a very small number of very expensive products; 2) sell a larger number of midpriced products; or 3) sell a very large number of inexpensive products. With an impoverished middle class no longer able to find the scratch for $5000/pair speakers and the large amount of capital required to make or sell large quantities of beer-budget products not being available to small businesses (as 80% of high-end audio companies are), the only viable business strategy is Option 1: move upmarket to service the very small number of very rich customers. And good for them if, by doing so, audio companies can stay in business. As veteran audio journalist Ivan Berger said recently on Facebook, “One of the things I like about the audio business is that most of the people got in it because it mattered to them, not because it would make them rich. (A few of them got rich anyway, and more power to them.)”

But what happens when the concentration on luxury goods distorts the market? Magnepan introduced its new loudspeaker, the MG3.7, at T.H.E. Show in January, at an affordable $5495–$5895/pair. Pleased at finally encountering a new speaker in Las Vegas whose purchase didn’t require the sale of a middle-class audiophile’s kidney, I congratulated Magnepan’s Wendell Diller on the price, and offered the opinion that it must have been welcomed by dealers. To my surprise, he told me that the opposite was the case: Some Magnepan dealers felt that the MG3.7 should have been priced higher, perhaps at as much as $10,000/pair.

Diller expanded on this in a subsequent e-mail, which I reprint with his permission: “I pushed back at the efforts of some of our dealers and distributors (and some reviewers) to persuade [CEO] Mark Winey that we should be charging more for the ‘3.7. We have a reputation for American-made and high value. We have an adequate profit margin. Why squander our reputation? We got our reputation because we really are frugal (plus clever engineering). Our wages are very modest, but this is a fact of life if we are to compete in a global market. I told the dealers ‘Sell more.’ Some responded that a higher price wouldn’t hurt sales.”

Stick to your guns, Wendell. Richard Vandersteen told me a decade ago that the only companies that would endure in the then-new century would be those whose products offered more quality than the customer was expecting for the price. I make no apology, therefore, for featuring two such giant-killer products on this issue’s cover: the Wharfedale Diamond 10.1 ($350/pair), and PSB Alpha B loudspeakers ($279/pair), both of which are featured in Stephen Mejias’s “The Entry Level” column (p.45). While I respect and lust after the megabucks components, it is these products for the rest of us that keep me optimistic and excited about the long-term viability of high-end audio. Otherwise, the upward price spiral will become a downward death spiral.

Art Dudley’s Centennial
As a fan of audio writer and reviewer Art Dudley, I felt no guilt over the fact that it was the demise of his magazine, Listener, that made it possible for him to join Stereophile as its editor-at-large at the end of 2002. The first installment of Art’s “Listening” column appeared in January 2003, and the 100th installment is featured in this issue (p.37), for which we commissioned a portrait of Art by Jeff Wong. Art’s “Listening” columns are available in our free online archive. Looking forward to the next 100 essays, Art!

Footnote 1: This essay is based on the keynote speech I gave at the 2011 T.H.E. Show, held concurrently with CES in Las Vegas.

Footnote 2: Occasional Stereophile contributor Steve Guttenberg recently wrote on his Facebook page: “When high-end hi-fi starts to seem excessive, consider the $335,000 Forester Rotonde de Cartier Astroregulateur watch. Right, a freakin’ watch!”

NEXT: Letters »


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