GIOLAS: The industry is sliding, ironically, because it has attempted to grow quickly. It has tried to apply some commodity ideals, ideas, and strategies to growth that are not only incompatible with a specialty high-end market, but are corrosive to it. Specialty markets in any high-end industry—including audio—are fundamentally about the experience they provide, not the stuff they make.
MENACKER: It’s impossible to explain to a customer what highend audio is all about. But there are relatively few places in the United States or the world where the customer can go and get a really good demonstration of what our industry is capable of providing. In rare cases when there is coverage of high-end audio it is usually sensationalized, so we look like a bunch of weirdos.
GIOLAS: The only way to understand the experience is to be exposed to it. Consequently, it’s difficult, if not impossible, to broaden the market by lowering the common denominator and just telling the story in a more broad-based way. Unfortunately, by and large, people who come to any specialty industry come individually, one convert at a time. It takes guys like Terry, who have invested literally millions in that structure and the business and the resources, to sit that potential customer down and expose him to something that he’s never been exposed to before. That conversion is irrefutable to him. It is permanent. It is indelible. That guy inevitably has ten or fifteen or twenty associates whom he exposes that experience to through his own gear, and then brings those associates to Terry, too, or to someone else. Creating the market this way requires great patience and an understanding of the premise itself, and a commitment to engage in the process of conversion. The other formula is trying to broaden the customer base more quickly by using more corporate ideals—lowering the common denominator, broadening distribution through lessthan- experiential kinds of retailers such as chain stores, or moving into areas of non-expertise, such as control systems and central vacuum. Unfortunately, that approach dilutes what we do, because we’re an industry of companies with finite resources. Taking the corporate approach dilutes those companies’ ability to convey and teach about the experience.
KANAGAT: If you market and sell products the way that commodities are sold, people will assume the products are commodity- like.
GIOLAS: Our business is the antithesis of mass-market. Those ideals are corrosive to it. HARLEY: It seems to me that ten or fifteen years ago, many high-end retailers started copying the mass-market retailers’ techniques rather than further differentiating themselves from the mass merchandisers and demonstrating why they and their products were special. Some dealers lost the enthusiasm and passion that characterized the best retailers.
GIOLAS: That’s a great point, Robert.
KANAGAT: There’s another hidden problem: The industry i
predicated on low volumes and high-percent margins, not unlike other specialty categories. I don’t mean that the margins are excessively high, but they are naturally higher than, say, products sold in Costco. This allows anyone with a product idea to enter the market easily if they can find someone to move product for them. All they need to do is sell a few products to stay in business, at least for a while. It keeps creativity alive, but also fosters continued fragmentation of the industry and limits the market for more stable and longer-lived companies.
MENACKER: It fosters fragmentation and also has the potential to alienate customers. There are many cases where manufacturers and retailers alienate customers by selling products that were overpriced, and by selling products from companies that went out of business. Some of them finally said: “Enough already! I’m going to go buy a boat.” They see these high-end audio guys as a bunch of con men.
GIOLAS: I want to touch upon two points Atul made that are salient to the argument. The first is that the margin creates a low entry-barrier to new companies, and second, that it increases fragmentation. Those are true, but another factor that works to the detriment of the industry is that the disparity between the bigger and more established companies and the smaller start-up companies has widened. When I started in the business, Audio Research and Magnepan and Thiel and Wilson were very small companies…
KANAGAT: But they were integral players in building high-end audio.
GIOLAS: They were the founders of the American new wave, but the fact is that they had, through a small community of retailers, a vehicle to sell their products. Audio Research and Wilson and Thiel and Vandersteen and Magnepan and Mark Levinson and Krell are now the establishment of high-end audio. The retailers of this group who built the brand equity in their community of clients with these brands a decade or two ago have become largely addicted to that brand equity. So where do the small, start-up manufacturers go to sell their products? They’re left to the Internet and direct selling, and other less legitimate vehicles. The reason these vehicles are less legitimate is that they don’t provide the customer with the long-term experience and support that is integral to the high end. Sonic performance is the pinnacle on top of a broader-based set of experiential needs that must be provided, such as long-term service, simply staying in business, and reliability. In other words, the performance itself—the experience— can’t be maintained if the product breaks and it’s not repairable. It’s the experience of owning the product rather than just listening to it.