Changewave Research: Personal Gadgets and Home Entertainment

ChangeWave Research: Personal Gadgets and Home Entertainment

ChangeWave Research Report:

Personal Gadgets and Home Entertainment

New Digital BoomTriggers a Surge in Online Shopping

Overview

Everyone seemsfixated on ‘the new digital living room.’ Are personal gadgets and home entertainment firingup a full-fledged mega-digital boom?

During the week of January 6-12, 2004 we surveyed Alliance memberson their consumer electronics spending patterns and behavior for the coming year. A total of 1,266 members participated.The results spotlight the consumer electronics items, shopping trends and individual stores set towin and losein 2004.

Key Findings

Consumer Electronics Spending –Greater Than Expected Over the Holidays.Thirty-nine percent (39%) of Alliance respondents reported they had spent more than expected on consumer electronics during the Holidays, only 20% reported they had spent less, for a solid Net Difference Score of +19percentage points.

HottestHoliday Items. The biggest gainers from a year ago were Digital Cameras, which jumped from20% in 2002 to 26% in 2003 (net gain = +6 percentage points), and Desktops/Laptops (net gain = +5). Other gainers includeSatellite Radio (net gain = +3), MP3/Digital Music Players (net gain = +3), Wi-Fi Routers (net gain = +3),Cell Phones (net gain = +3), and DVD-R Players (net gain = +2).

Looking Forward: An Increased Willingness to Spend. Importantly, 1-in-2respondents (53%) said they are willing to increase spending on home entertainment and networking in 2004 if new services and products become available. Only a third (32%) said their home entertainment and networking budget for 2004 is fixed.

Hottest Items – Next Six Months. Looking at future consumer demand, several items are set to do better than they did a year ago, including Desktops/Laptops (jumping from 18% in 2003 to 26% in 2004; net gain = +8 percentage points), Satellite Radio (net gain = +3), Wi-Fi Routers (net gain = +2), MP3/Digital Music Players (net gain = +2), PVRs (net gain = +2), and Plasma Flat Panel Televisions (net gain = +2).

Items Slowing Down – Next Six Months. Several items look to do worse over the next six months versus a year ago, led by DVD Players (net loss = -4). Surprisingly, DVD-R Players (net loss = -3) and Digital Cameras (net loss = -2) appear like they’ll do worse than they did a year ago, possibly signaling temporary saturation among our early adopter members after strong holiday demand. PDAs (net loss = -2) and Video Game Consoles (net loss = -2) also look weaker than a year ago.

Budgets for Home Entertainment and Networking. Nearly 2-in-5 respondents (38%) said they currently spend between $51 - $100 per month on home entertainment and networking services. Another three-in-ten (29%) spend between $101 - $200 monthly, while 5% spend more than $200.

Current Shopping Preferences –Online Shopping Surges. Online Shopping (50%) jumped an impressive 7 percentage points since our findings of last April. Discounters registered a 4 percentage point increase. Overall, Big Box Specialty Stores currently remain the favorite place to shop for consumer electronics products (67%), registeringa modest 3 percentage point improvement over the results of our April 2003 survey. Flat growth was found in theother shopping categories.

Shopping Trends for 2004: Strong Online Shopping Growth Will Continue. We asked respondents to tell us the types of stores they would be spending more money at and less money at on home entertainment and networking products over the next 12 months – and calculated the net difference score (more minus less) for each type. We then compared these results with our April 2003 survey results and found Online Shopping will be the biggest winner for the year ahead. Big Box Specialty Stores also show strength for 2004.

Change in Net Difference Score

April 2003– January 2004

Online Shopping+11 Percentage Points

Big Box Specialty Stores+ 7 Percentage Points

Discount Stores+ 4 Percentage Points

Specialty Stores+ 3 Percentage Points

Local Specialty Stores+ 3 Percentage Points

Individual Store Preferences. With regards to home entertainment and networking, Best Buy (50%) continues to be one of the stores our respondents most prefer to shop at – far ahead of key competitor CircuitCity (23%). Costco was picked by 16% of respondents. Three Online Shopping stores also picked up a double-digit response: Amazon (16%), Dell Online (15%), and EBay (10%). Behind the above stores was Wal-Mart, chosen by 9% of respondents.

The ChangeWave Alliance is a group of 4,000 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

Helping You Profit From A Rapidly Changing World ™

Table of Contents

Summary of Key Findings...... 4

Introduction...... 4

The Findings...... 4

Part One: Overall Holiday Spending Patterns...... 4

Part Two: Home Entertainment and Networking...... 7

ChangeWave Research Methodology...... 11

About ChangeWave Research...... 12

I. Summary of Key Findings

Introduction

During the week of January 6-12, 2004 we surveyed Alliance members on their consumer electronics spending patterns and behavior for the coming year. A total of 1,266 members participated. The results spotlight the consumer electronics items, shopping trends and individual stores set to win and lose in 2004.

II. The Findings

Part One: Overall Holiday Spending Patterns

(1) Question Asked: Focusing specifically on "consumer electronics" items (e.g., cell phones, PCs, flat screen TVs, DVDs, etc.), did you end up spending more on "consumer electronics" items, less, or about what you had expected on these items during the holiday season?

More on Consumer Electronics Items / 39%
Less on Consumer Electronics Items / 20%
About What I Had Expected on Consumer Electronics Items / 40%
Other / 1%

Consumer Electronics Spending –Greater Than Expected Over the Holidays. Thirty-nine percent (39%) of Alliance respondents reported they had spent more than expected on consumer electronics during the Holidays, only 20% reported they had spent less, for a solid Net Difference Score of +19percentage points.

(2) Question Asked:Which of the following items did you purchase either as a gift for someone else or for yourself during the holidays? (Check All That Apply)

Current
Post Holiday
Spending
Survey
Jan ‘04 / Last Year’s
Post Holiday
Spending
Survey
Jan ‘03 / Net Gain
Digital Cameras / 26% / 20% / +6
Desktop (10%) + Laptop (9%) Computers* / 10% + 9%=19% / 14% / +5
Satellite Radio / 4% / 1% / +3
MP3/Digital Music Players / 11% / 8% / +3
Wi-Fi Routers / 7% / 4% / +3
Cell Phones / 18% / 15% / +3
DVD-R Players / 5% / 3% / +2
GPS (Global Positioning System) Devices / 2% / 1% / +1
Plasma Flat Panel Televisions / 1% / 1% / 0
PVRs / 2% / 2% / 0
"Hybrid" PDAs (Multi- Communication) / 1% / 1% / 0
2-Way Messaging Devices / 1% / 1% / 0
Video Game Consoles / 7% / 7% / 0
DVD Players / 22% / 23% / -1
Video Cameras / 3% / 4% / -1
New Cell Phone Service / 8% / 10% / -2
PDAs / 5% / 8% / -3
LCD Flat Panel Televisions / 3% / NA / --
DLP-Based Televisions / 1% / NA / --
Satellite TV / 3% / NA / --
Digital/LCD Projector / 1% / NA / --
3G Phones / 2% / NA / --
Music Download Service / 2% / NA / --
Digital Music/Photo/Video Mgmt. Software / 5% / NA / --
Home Entertainment Servers / 1% / NA / --
Printers / 11% / NA / --
High-Speed Internet Cable Service / 4% / NA / --
High Speed Internet DSL Service / 4% / NA / --

*Please note that in the Jan. ’03 survey we included the term Personal Computers, but in the Jan. ’04 survey we included the terms Desktop Computers and Laptop Computers.
Hottest Holiday Items.The biggest gainers from a year ago were Digital Cameras, which jumped from 20% in 2002 to 26% in 2003 (net gain = +6 percentage points), and Desktops/Laptops (net gain = +5). Other gainers include Satellite Radio (net gain = +3), MP3/Digital Music Players (net gain = +3), Wi-Fi Routers (net gain = +3), Cell Phones (net gain = +3), and DVD-R Players (net gain = +2).

(3) Question Asked:Which of the following items do you plan on buying for yourself or for someone else during the next six months? (Check All That Apply)

Current
Survey
Jan ‘04 / Previous
Survey
Jan ‘03 / Net Gain
Desktop (12%) + Laptop (14%) Computers / 12%+14%=26% / 18% / +8
Satellite Radio / 6% / 3% / +3
Wi-Fi Routers / 8% / 6% / +2
MP3/Digital Music Players / 7% / 5% / +2
PVRs / 3% / 1% / +2
Plasma Flat Panel Televisions / 6% / 4% / +2
Cell Phones / 13% / 12% / +1
New Cell Phone Service / 10% / 9% / +1
GPS (Global Positioning System) Devices / 5% / 4% / +1
Video Cameras / 5% / 5% / 0
2-Way Messaging Devices / 1% / 1% / 0
"Hybrid" PDAs (Multi- Communication) / 4% / 4% / -1
Video Game Consoles / 1% / 3% / -2
PDAs / 4% / 6% / -2
Digital Cameras / 18% / 20% / -2
DVD-R Players / 8% / 11% / -3
DVD Players / 8% / 12% / -4
LCD Flat Panel Televisions / 10% / NA / --
DLP-Based Televisions / 2% / NA / --
Satellite TV / 4% / NA / --
Digital/LCD Projector / 2% / NA / --
3G Phones / 3% / NA / --
Music Download Service / 3% / NA / --
Digital Music/Photo/Video Mgmt. Software / 5% / NA / --
Home Entertainment Servers / 4% / NA / --
Printers / 10% / NA / --
High-Speed Internet Cable Service / 4% / NA / --
High Speed Internet DSL Service / 5% / NA / --

*Please note that in the Jan. ’03 survey we included the term Personal Computers, but in the Jan. ’04 survey we included the terms Desktop Computers and Laptop Computers.

Hottest Items – Next Six Months. Looking at future consumer demand, several items are set to do better than they did a year ago, including Desktops/Laptops (jumping from 18% in 2003 to 26% in 2004; net gain = +8 percentage points), Satellite Radio (net gain = +3), Wi-Fi Routers (net gain = +2), MP3/Digital Music Players (net gain = +2), PVRs (net gain = +2), and Plasma Flat Panel Televisions (net gain = +2).

Items Slowing Down – Next Six Months. Several items look to do worse over the next six months versus a year ago, led by DVD Players (net loss = -4). Surprisingly, DVD-R Players (net loss = -3) and Digital Cameras (net loss = -2) appear like they’ll do worse than they did a year ago, possibly signaling temporary saturation among our early adopter members after strong holiday demand. PDAs (net loss = -2) and Video Game Consoles (net loss = -2) also look weaker than a year ago.

Part Two: Home Entertainment and Networking

(1) Question Asked:Do you consider your current home entertainment and networking services budget to be fixed, or are you willing to increase it during 2004 if new services and products become available?

Current Home Entertainment/Communications Budget is Fixed / 32%
Willing to Increase It In 2004 If New Services/Products Become Available / 53%
Don't Know / 14%
Other / 1%

Looking Forward: An Increased Willingness to Spend. Importantly, 1-in-2 respondents (53%) said they are willing to increase spending on home entertainment and networking in 2004 if new services and products become available. Only a third (32%) said their Home Entertainment/Communications Budget for 2004 is Fixed.

(2) Question Asked:How much do you currently spend on home entertainment and networking services per month?

Budgets for Home Entertainment and Networking. Nearly 2-in-5 respondents (38%) said they currently spend between $51 - $100 per month on home entertainment and networking services. Another three-in-ten (29%) spend between $101 - $200 monthly, while 5% spend more than $200.

(3) Question Asked:Currently, when I shop for home entertainment and networking products, I prefer to buy them at:(Check All That Apply)

Current
Survey
Jan ‘04 / Previous
Survey
Apr ‘03
Discount store (e.g., Price Club, Target, Wal-Mart) / 36% / 32%
Big Box Specialty Stores store (e.g., Best Buy, CircuitCity) / 67% / 64%
Specialty Stores (e.g., Tweeters) / 10% / 9%
Local Specialty Store / 11% / 15%
Online / 50% / 43%
None of the Above / 1% / 2%
Other / 2% / NA

Current Shopping Preferences –Online Shopping Surges.Online Shopping (50%) jumped an impressive 7 percentage points since our findings of last April. Discounters registered a 4 percentage point increase. Overall, Big Box Specialty Stores currently remain the favorite place to shop for consumer electronics products (67%), registering a modest 3 percentage point improvement over the results of our April 2003 survey. Flat growth was found in the other shopping categories.

(4A) Question Asked:Over the next 12 months, I will spend more money than in 2003 on home entertainment and networking products at the following types of stores: (Check All That Apply)

Current
Survey
Jan ‘04
Discount store (e.g., Price Club, Target, Wal-Mart) / 23%
Big Box Specialty Stores store (e.g., Best Buy, CircuitCity) / 41%
Specialty Stores (e.g., Tweeters) / 5%
Local Specialty Store / 7%
Online / 41%
None of the Above / 20%
Other / 2%

(4B)Question Asked:Over the next 12 months, I will spend less money than in 2003 on home entertainment and networking products at the following types of stores: (Check All That Apply)

Current
Survey
Jan ‘04
Discount store (e.g., Price Club, Target, Wal-Mart) / 16%
Big Box Specialty Stores store (e.g., Best Buy, CircuitCity) / 17%
Specialty Stores (e.g., Tweeters) / 17%
Local Specialty Store / 16%
Online / 6%
None of the Above / 36%
Other / 1%
Net Difference Score – Current Survey
(Jan. ’04) / Current Survey
More
Money / Current Survey
Less
Money / Current Survey
Net
DifferenceScore
(percentage points)
Online / 41% / 6% / +35
Big Box Specialty Stores store (e.g., Best Buy, CircuitCity) / 41% / 17% / +24
Discount store (e.g., Price Club, Target, Wal-Mart) / 23% / 16% / +7
Local Specialty Store / 7% / 16% / -9
Specialty Stores (e.g., Tweeters) / 5% / 17% / -12
Net Difference Score – Previous Survey
(Apr. ’03) / Previous Survey
More
Money / Previous Survey
Less
Money / Previous Survey
Net
DifferenceScore
(percentage points)
Online / 31% / 7% / +24
Big Box Specialty Stores store (e.g., Best Buy, CircuitCity) / 37% / 20% / +17
Discount store (e.g., Price Club, Target, Wal-Mart) / 21% / 18% / +3
Local Specialty Store / 9% / 21% / -12
Specialty Stores (e.g., Tweeters) / 5% / 20% / -15

Shopping Trends for 2004: Strong Online Shopping Growth Will Continue. We asked respondents to tell us the types of stores they would be spending more money at and less money at on home entertainment and networking products over the next 12 months – and calculated the net difference score (more minus less) for each type. We then compared these results with our April 2003 survey results and found Online Shopping will be the biggest winner for the year ahead (Change in Net Difference Score = +11 percentage points):

Change in Net Difference Score –
Current Survey (Jan. ’04) vs.
Previous Survey (Apr. ’03) / Current Survey Net
DifferenceScore
(Jan. ’04) / Previous Survey Net
DifferenceScore
(Apr. ’03) / Change
in Net
Difference
Score
Online / +35 / +24 / +11
Big Box Specialty Stores (e.g., Best Buy, CircuitCity) / +24 / +17 / +7
Discount Store (e.g., Price Club, Target, Wal-Mart) / +7 / +3 / +4
Specialty Stores (e.g., Tweeters) / -12 / -15 / +3
Local Specialty Store / -9 / -12 / +3

Along with Online Shopping, Big Box Specialty Stores also show strength for the year ahead (Change in Net Difference Score = +7 percentage points).

(5) Question Asked:Which one or two of the following stores do you most prefer to shop at for home entertainment and networking products?(Choose No More Than Two)

Best Buy / 50%
CircuitCity / 23%
Costco / 16%
Amazon / 16%
Dell Online / 15%
EBay / 10%
Wal-Mart / 9%
Buy.com / 7%
Overstock.com / 4%
CDW / 2%
Tweeter / 2%
Other / 1%

Individual Store Preferences. With regards to home entertainment and networking, Best Buy (50%) continues to be one of the stores our respondents most prefer to shop at – far ahead of key competitor CircuitCity (23%). Costco was picked by 16% of respondents. Three Online Shopping stores also picked up a double-digit response: Amazon (16%), Dell Online (15%), and EBay (10%). Just behind the above stores was Wal-Mart, chosen by 9% of respondents.

III. ChangeWave Research Methodology

This report contains the findings from a recent ChangeWave Alliance survey on personal gadgets and home entertainment trends for 2004. The survey was conducted the week of January 6 - 12, 2004, and a total of 1266Alliance members participated.

The Alliance’s proprietary research and business intelligence gathering system is based upon the systematic gathering of valuable business and investment information directly over the Internet from accredited members.

ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, interprets and reconciles the information in a cohesive manner and converts the information into valuable quantitative and qualitative reports.

The Alliance has assembled its membership team from senior technology and business executives in leading companies of select industries. Nearly 3 out of every 5 members (58%) have advanced degrees (e.g., Master’s or Ph.D.) and 94% have at least a four-year bachelor’s degree.

The business and investment intelligence provided by the Alliance provides a real-time view of companies, technologies and business trends in key market sectors, along with an in-depth perspective of the macro economy – well in advance of other available sources.

IV. About ChangeWave Research

ChangeWave Research, of Phillips Investment Resources, Inc. is a market research intelligence network powered by thousands of accredited and organized front-line professionals – the ChangeWave Alliance.

ChangeWave is the alternative to traditional “sell-side” investment research. The company publishes ChangeWave Investing, the investment advisory service for individual investors dedicated to researching and discovering growth stocks that profit from radical change, and Weekly WaveWire, a free e-mail newsletter distributed to nearly 200,000 investors.

ChangeWave has a very unique asset in its 4,000-member Alliance. We have assembled our membership team from a broad cross section of more than 20 vertical markets such as Internet e-commerce, semiconductors, data storage, and biotechnology, along with a wide range of professional disciplines including CIOs, IT managers, executive management, scientists, engineers and sales personnel.

The ChangeWave Alliance is composed of senior technology and business executives in leading companies – credentialed professionals who spend their everyday lives working on the frontline of technological change.

ChangeWave Research Reports provide a real-time view of companies, technologies and business trends in key market sectors along with an in-depth perspective of the macro economy – well in advance of other available sources. ChangeWave surveys its 4,000 Alliance members on a wide range of investment research topics and converts the findings into valuable investment and business intelligence reports. ChangeWave delivers its products and services on the Web at

ChangeWave Research does not make any warranties, express or implied, as to results to be obtained from using the information in this report. Investors should obtain individual financial advice based on their own particular circumstances before making any investment decisions based upon information in this report.