In an environment marked by high panel prices, weak demand, and increasingly intense market competition, the color TV industry has entered a phase of low-profit hardware. However, the industry is no longer solely dependent on hardware sales. With the growing number of online users, leading TV manufacturers like Hisense have shifted their focus toward large-screen operations, redefining the business model of the color TV industry.
Hardware profits are shrinking. In the first half of last year, as panel prices continued to rise, Chinese TV manufacturers saw a significant drop in profit margins. According to Ove Cloud Network data, the net profit margin for China’s color TV industry was 3% in 2011, dropped to 1.5% in 2014, and fell below 1% in the first half of 2017. The declining profit rate has directly impacted the profitability of TVs. Nail Technology identified three main factors behind this slim margin:
First, the high cost of panels. As we know, the panel is the largest component of a TV, accounting for about 50-60% of the total cost. Since 2016, panel prices have surged significantly. From early 2016 to July 2017, the average price increase was around 40%. Although panel prices declined slightly in the fourth quarter of last year, the decrease was minimal. Currently, panel prices remain relatively high. For example, in October 2016, the price of a 55-inch panel increased by $10 and continued rising for several months. By October 2017, it had only dropped by $5, far from returning to normal levels.
Second, internet companies are competing with aggressive pricing strategies. Since 2015, internet TV platforms have been aggressively entering the market, using price wars to capture market share from traditional TV brands. Xiaomi, for instance, launched a 4A 50-inch TV in January of this year at just 2,399 yuan, offering cost-effective and smart voice interaction features. Its 4A 32-inch model was priced at only 1,099 yuan. These affordable models attracted many consumers and put pressure on other brands.
Third, fierce competition has led to lower profit margins. With limited market demand growth, manufacturers resort to promotions and price cuts to drive sales. However, excessive price reductions have further eroded net profits. According to Ove Cloud Network data, the net profit margin for China’s color TV industry fell below 1% in 2017.
Despite the challenges, there is great potential in content operations. As the hardware profit margin shrinks, especially when panel costs don’t fall significantly, content operations have become a key source of revenue for TV manufacturers.
First, the user base for top brands is impressive. According to Hisense’s latest Internet TV user data, the number of users exceeded 30.78 million in 2017 (25.21 million domestically and 5.57 million internationally). Skyworth’s Kukai brand also announced that the number of Internet-enabled terminals in mainland China surpassed 20 million at the start of last year.
Hisense and Skyworth are focusing on expanding their Internet TV user base through large-screen operations, which helps boost content-driven revenue. In 2016 alone, Hisense's Internet TV VIP membership grew 8 times year-on-year, and Coocaa generated over 100 million yuan in operational income.
Second, the value of large-screen Internet operations is accelerating. From a content perspective, Internet TV enhances home entertainment experiences by supplementing traditional TV content and integrating entertainment, shopping, and education, thereby increasing user engagement. According to the "OTT Consumer Insights and Business Value" report by Dentsu Group, over 53% of users spend more than two hours daily on OTT services.
From a business model standpoint, OTT services are not only driven by advertising but also by affiliate marketing, which is fueling growth. With a growing user base, OTT is still in an expansion phase, offering substantial room for future development.
According to Ove Cloud Network, as of the end of 2016, the number of OTT terminals (smart TVs and boxes) in China reached 213 million units. It is expected to exceed 400 million by 2020. Additionally, OTT advertising revenue hit 2.3 billion yuan in 2017, a 130% increase compared to the previous year.
Nail Technology believes that, given supply chain pressures and market competition, the profit margin for color TV hardware will continue to shrink. Therefore, TV companies must invest more in building and promoting large-screen Internet capabilities while expanding their user base and exploring sustainable business models.
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