E-Commerce & Specialty Audio Retailing

"But I want to buy Thiel loudspeakers over the Internet!" cried an insistent music lover from the back of the room.

"I'm sorry, but you are not our customer," replied Thiel Audio Products president Kathy Gornik.

Gornik had just patiently explained her company's sales policy to a roomful of contentious audio professionals and hi-fi fans: no Internet sales, period.

"All sales transactions between customers and dealers must take place in person," she stated, leaving no room for interpretation.

The scene was an Audiocafe.com-sponsored panel discussion at CES 2000, in which high-end manufacturers and Internet entrepreneurs pondered the question: Everyone loves music, so why don't they love specialty audio? The discussion quickly turned to the changes being wrought by the Internet on the relationships between manufacturers, retailers, and consumers. Other manufacturers on the panel, like cable maker Ray Kimber and speaker builder Peter Noerbaek, explained their policies, too: no sales to customers over the Net. Kimber said he comes down hard on any dealer caught selling his products online; Noerbaek said he refers all Net inquiries to the nearest PBN Audio dealer, "even if he's hundreds of miles away."

Rules like these protect valued dealers in an uncertain market, but they may also prevent specialty audio products from reaching a broader audience: the millions of music lovers who live in small towns and rural areas far from major cities, where almost all specialty audio shops are found. The Internet makes available to these music lovers all the information manufacturers can post about their products: beautiful pictures, technical descriptions and drawings, professional reviews, user feedback. Most specialty audio companies have extensive websites, where their wares are tantalizingly displayed. Even Thiel does. Yet despite the ubiquity of "Contact Us" features, these websites are surprisingly non-interactive. Manufacturers can show all to eager customers, but customers cannot really engage the manufacturers. With few exceptions, that must still be done through any manufacturer's most effective—or most damaging—interface with the customer: the local dealer.

Any discussion of the Internet's impact on specialty audio comes around to "the dealer problem." In this industry, startup manufacturers go to almost any length to sign up dealers: extended terms, liberal return policies, free shipping, co-op advertising—whatever it takes to get exposure. If the promotional campaign goes well, a manufacturer grows bigger and stronger, shifting the balance of power. Difficult dealers then face losing their subsidized ride. Retail problems that a startup manufacturer must tolerate to sustain a public presence become intolerable once he or she reaches sufficient size and strength.

A few industry leaders, in fact, are so strong that they can dictate policy ex cathedra. Sony Corporation did just that in late January, with the sweeping announcement that, later this year, it would begin making its vast inventory of consumer electronics available directly to consumers over the Internet—presumably, at retail prices. Sony dealers can like it or they can lump it, but chances are that most of them are going to accept Tokyo's decree because they can't afford not to. Where Sony goes, the consumer-electronics industry follows.

Sony isn't the only industrial giant to rethink its distribution model in the wake of the exploding Internet. Automakers like Toyota and General Motors have publicly discussed massive reorganizations of their sales networks, in which customers would order new vehicles online and pick them up a few days later at the nearest dealer—in effect, taking the "just in time" manufacturing concept into the retail arena. Car dealers would downsize inventory on hand, the acreage needed to store it, and, of course, personnel. Predicted effects: lower costs for consumers, higher profits for dealers and manufacturers. The endangered species in this scenario is the retail salesperson working on commission, whose role will eventually become more that of a product demonstrator.

Reactionaries perceive an announcement like Sony's as a death knell for traditional retailing, much the way the film industry predicted its own demise with the rise of television, and later with videocassette. Rather than give up, the film industry responded by offering something more: widescreen pictures and multichannel sound, features it would take the consumer electronics and broadcast industries half a century to match. Industries and retail businesses alike are ruled by one principle of economic Darwinism: adapt or die.

They are also subject to certain laws of economics—out of fashion, for the moment—that determine their ultimate survival. One is the need to make a profit. Despite the conceptual gymnastics performed by analysts and economists attempting to justify the overinflated market valuations of Internet companies that may never make money, eventually all businesses must turn a profit or close their doors. Only curmudgeons have the bad taste to bring this up during the longest-running party in the highest of high seasons, but the hysteria for all things Internet resembles the tulip craze that gripped Holland in the 1600s. Like their Silicon Valley counterparts, the Dutch believed that they had found a permanent cure for poverty, and suffered a prolonged bout of depression when the bubble burst.

Underfunded startups, and those without a clear concept of what is and is not a good business model for the Internet, are discovering this sobering truth at an increasing rate. The attrition rate may one day snowball to the point of consuming even such monsters of the midway as Amazon.com, whose CEO Jeffrey Bezos became Time's 1999 "Person of the Year"—and a billionaire—by losing hundreds of millions of dollars of other people's money. The honors were bestowed on Bezos not for his business savvy but for his exploration of the route to the new El Dorado.

Cynics might dismiss his enterprise as little more than a huge and slickly choreographed pyramid scheme, destined to collapse once the pool of speculators is exhausted. Even so, Bezos has proven beyond all doubt the commercial viability of the Internet, which should not be mistaken for the hysteria surrounding it.

The Net is no tulip craze. Within a few years, most of this planet's 6 billion people will have high-speed access to everything offered for sale anywhere. Internet terminals will become as commonplace as the telephone is today. The world is shrinking as the universe expands.

A common mistake is to believe that the birth of the new means the death of the old. The wise, the clever, and the nimble in the specialty-audio industry will find that there is room for all in this expanding universe. Specialty-audio manufacturers and retailers can choose to ignore the Internet's inevitability, or they can find a way to adapt and thrive. Consumers already are.