Everyone’s wondering how the holiday market for electronics goods will do this time around. The financial meltdown is in full swing, and oil prices, which reached historic highs only in October, exited that month at less than half their peak (see figure below). In all this, will consumers be in a buying mood? How will today’s market shape consumer electronics purchases? We’ll share how Objective Analysis views the holiday market.

Impact of financial meltdown

Most of the Christmas build has already been completed. OEMs have already made much of what will appear in stores in November and December. These buys have been disappointing to some sectors of the semiconductor market (namely memories), but there has been modest growth in others.

Some of this decrease is the result of soft prices. Although PC and consumer electronics product shipments grew from 10%-12% in Q3 alone, non-memory semiconductor revenues are only 5%-6% above those of last year, with the rest of the growth lost in price declines.

Not all of the reduction we see is a result of decreased prices. Japanese and Korean telecom services providers have cut back on their handset subsidies, a factor that has had a huge impact on demand for components of high-end handsets.

Even though memory prices fell by as much as 60% from last holiday season, this didn’t drive a jump in consumer demand for memory-centric products. MP3 players are seeing a bit of a slowdown in memory consumption, although sales of controllers in this market are still strong. It seems that consumers see little advantage in upgrading from a 1,000-song player to a 2,000-song or 4,000-song model.

It is quite possible that the huge number of foreclosures in the US will actually drive an increase in holiday purchasing. Renters generally have more disposable income than homeowners since they tend to apply less of their income toward rental payments, while homeowners sink theirs into home payments. Picture a family that lost their home in 2008 living in a rental, trying to use Christmas to give an upbeat ending to an otherwise gloomy year. One would guess that they would splurge a little on gifts to brighten everyone’s day. Although this will not be true of the jobless, a small percentage of those who lost their homes are also jobless. Pile on top of this the increase in bankruptcies, and things look even more positive, since those who successfully file for bankruptcy find themselves suddenly open to entire new lines of credit.

Mini notebook PCs will impact the notebook market

One interesting phenomenon is that users are embracing the mini notebook PCs in a big way. These small devices sometimes use flash and sometimes HDDs for storage, but are offered in a small form factor at a low price. Their design is inspired by the $100 BOM laptops designed to bring computing to developing nations. Perhaps the low price is driving acceptance in today’s market. We would not be surprised to see a temporary slowdown in the notebook market as consumers purchase these devices and subsequently postpone the purchase of their next notebook.

Meanwhile, PCs seem to have settled on a 2GB average DRAM size for Microsoft’s Windows Vista operating system, and are not taking advantage of today’s bargain-basement prices to grow to 4GB, 8GB, or more.

Energy efficiency

When oil skyrocketed to its $148 high everyone expected energy efficiency to be a big driver. Suddenly oil has plunged in price — the price of a barrel of oil is now less than half its peak. What 2008 has shown us, though, is that prices can go up and down in an instant. Consumers have lost trust that gas prices might remain at any one level for long.

Crude oil world spot market price/barrel. (Source: Objective Analysis, US Energy Info. Admin.)
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This causes us to consider the possibility that consumers will upgrade electronics to improve their energy consumption. Now we don’t imply that husbands will be giving their wives a smart thermostat or solar panels for Christmas (“Just what I always wanted, dear!”) but the energy savings cause can be used as an argument to buy a personal navigation device (PND). In some cases it might even lead to the purchase of a new car that offers better mileage — and today’s cars can be viewed as a lot of chips housed in a very large metal cabinet.

Of course, some use energy savings as a reason to work from home. If you’re going to stay home more you will find new reasons to buy consumer goods. More time in front of the TV? Better upgrade the TV. Might as well upgrade the set-top box. More time on the Internet? That means a new PC or router.

Post-Olympic spending

Sales of LCD televisions built up to a frenzy just before the summer Olympics, and there has been a slight downturn in the wake of the games. This is driving TV makers to compete on price, opening the possibility that a number of new TVs will appear under the Christmas tree. There’s a halo effect with such purchases — when customers buy their first HDTV, they then buy companion products like Blu-ray players or upgrade their set-top box. (Haven’t we heard this before?)

YouTube effect

Nobody can ignore the big changes that happened in the Internet recently. Social networking has blossomed into something that everyone must hook into. LinkedIn, FaceBook, MySpace, and several other new sites are receiving phenomenal acceptance. Couple this with the popularity of text messaging services like Twitter and you have a global forum of people all connected to each other all the time.

None of these services seems destined to drive significant new semiconductor demand, but there is one new Internet service that could make all the difference in the world: YouTube. By making it simple to upload videos for others to view, this explosive website has opened an important door to home video viewing throughout the world. Videos on YouTube and its competitors are often captured on cell phones or with digital still cameras that incorporate video clip recording. New inexpensive camcorders have arrived, based on flash rather than optical storage or an HDD — their semiconductor content is significantly higher than older models while their mechanical costs are very low. Once a video has been posted on the Web, it can be downloaded for viewing and sharing on personal media players (PMPs) or cell handsets. This means that multiple copies of any one video will be stored in several locations at once, many of them flash-based. This is quite likely to drive surprise NAND flash demand well before we see an upsurge from SSD acceptance (which may still take a few years), along with increased demand of camcorder controllers.

Bottom line: What we should anticipate

All in all, we find that arguments exist for this holiday season to be no worse than most when it comes to electronics spending. Although some consumers will tighten their belts, others will try to brighten a difficult year with bountiful gift giving. The impact of energy prices is unclear.

We look for the 2008 gift-giving season to be relatively healthy despite the economic downturn and recent high energy prices — but weak chip prices will prevent this health from trickling down to chipmakers. A severe oversupply is depressing today’s prices. This will prevent increased unit shipments from driving profits, a situation that is unlikely to change until the second half of next year. J.H.