Consumer electronics retailer Best Buy (NYSE:BBY) has been struggling to grow sales, with a combination of factors working against the company's turnaround efforts. One unwelcome trend for Best Buy has been the contraction of the TV market, the result of consumers having little reason to upgrade their current LCD TVs. TV sales in the U.S. remained strong through 2011, but unit volume declined in each of the next two years, with the 34 million units sold during 2013 down from more than 38 million in 2011.
Consumers will need a compelling reason to upgrade their TVs, something they haven't had over the past few years. 3-D TVs, once touted as the next big thing, failed to live up to the hype, and while the technology is still offered in some TVs, it never really resonated with consumers. Smart TVs, with built in apps like Netflix, didn't introduce any functionality that doesn't already exist in game consoles and other devices used for streaming.
4K TVs, which have resolutions four times that of standard LCD TVs, could be what it takes to trigger a refresh cycle. The higher resolution allows for a sharper picture, even when displaying lower resolution content, and the very visible difference between 4K TVs and normal LCD TVs could finally drive consumers to upgrade en masse. While likely still a few years away, mainstream adoption of 4K TVs could give Best Buy exactly the boost it needs to return to growth.
What needs to happen
The two biggest issues holding back adoption of 4K TVs are price and content. Prices of 4K TVs are still measured in the thousands of dollars, although Vizio has managed to drive the price of a 50-inch 4K TV down to just $1,000. This is low enough that it could entice consumers to buy, although without any reviews of the newly launched TV available, it's not clear exactly which corners Vizio needed to cut to bring the price down this low.
The second problem is the lack of content. While 4K TVs will upscale standard HD content, making it look better in the process, a significant amount of native 4K content will be necessary before most consumers take a serious look at the technology. Netflix does have some 4K content available for streaming, such as popular shows Breaking Bad and House of Cards, but Netflix recommends an Internet connection with bandwidth of at least 25Mbps, well above the average of 10Mbps in the United States.
Besides a few things on Netflix, there's really nothing else available. No TV is broadcast at 4K, and Blu-ray discs don't currently support 4K resolutions. 4K Blu-rays are expected sometime in 2015, but playing them will require new Blu-ray players. Content will need to catch up before 4K TVs go mainstream.
This will likely take years, but the situation is very similar to the early days of LCD TVs. Prices were high and content was scarce, with Blu-ray not introduced until 2006, and with Netflix mainly a DVD-by-mail operation at the time. But LCD TVs eventually became the standard, and 4K TVs will likely follow a similar path.
What it means for Best Buy
In 2011, Best Buy commanded nearly a third of the revenue share of the U.S. TV market. While this number may be lower today thanks to competition from online retailers, Best Buy is still a major player in the TV market. In 2013, TV sales in the U.S. totaled $23.5 billion, meaning that Best Buy's annual TV sales are large enough that any increase going forward would have a meaningful impact on the company's financial performance.
4K TVs could provide Best Buy with the new, exciting product that it needs to spur both sales growth and traffic to its stores. CEO Hubert Joly has commented that a lack of innovation in the consumer electronics industry has been a big headwind, and 4K TVs could solve part of this problem.
4K TVs aren't a catalyst in the short term for Best Buy, but in a few years, recovering TV sales have the potential to reverse the current weakness plaguing the consumer electronics industry, helping Best Buy return to sales growth. Best Buy depends on consumers being driven to upgrade, whether it be TVs or PCs or smartphones, and 4K TVs may be just what the doctor ordered for the struggling retailer.
Timothy Green owns shares of Best Buy. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.