ReignCom plays chips to fend off giants
Sony, Apple prompt new pricing strategy by leading maker of MP3 players
Facing mounting pressure from global giants, ReignCom Ltd., a leading producer of MP3 players, is powering up a defense plan built on sliding chip prices.
The aggressive pricing strategy, adopted just weeks ago, is aimed at protecting its home turf and is expected to trigger a price war that should benefit consumers.
"We see more opportunity to get more aggressive with pricing," said Henry Kim, the company's vice president and one of 10 founding members of six-year-old ReignCom.
"ReignCom is by far the first to pass on the benefits of lower component prices, and that is important in this intensive state of competition," said Jason Oh, senior analyst who covers the software and multimedia industry at Goodmorning Shinhan Securities.
Henry Kim, vice president of ReignCom, shows off one of the company`s MP3 player models at his office in Seoul. [The Korea Herald]
ReignCom is the world's second-largest digital music-player manufacturer with a 14 percent share of the global market. Its iRiver models account for a fifth of all flash-memory music players sold in the United States.
The global operation generates some 60 percent of sales. Kim hopes to raise the percentage to 70 percent.
But ReignCom is not conceding the Korean market, where it accounts for more half of sales in a rapidly expanding environment. The task will be formidable.
Last month, Apple released its new iPod digital music players featuring a more affordable price and huge advantage in storage capacity.
An even greater threat is Sony Corp., the Japanese giant that dominated portable music with its Walkman cassette and CD players, said Oh. The iconic Walkman was a hip item among Korean teenagers in the 1980s and 1990s.
"Young Koreans feel a strong brand loyalty to Sony which is a grave threat to the local MP3 player manufacturers," said Oh.
Sony's representative in Seoul said the company, which has lost its leadership in portable music, will try to regain that crown with a radically styled model featuring much longer battery life. "We hope to revive our once grand Walkman brand," said Keum Hye-young, product assistant manager.
Reduced profitability
ReignCom's effort to defend its domestic market share has already taken a big chunk out of financial performance. On Friday, the company said that its second-quarter operating profit dropped by 33 percent to 11.2 billion won from the previous quarter mainly because of higher marketing expenses.
"Consumers recognize our brand. Still, we're not like Sony or Panasonic," said Kim, pointing out the company's short history.
The operating margin dropped to 11.5 percent compared to 20.1 percent in the first quarter and 23.9 percent a year earlier.
Analysts expect a continued squeeze on margins. They forecast the operating margin in the third quarter will drop to 16 percent from 23.8 percent a year ago, largely due to a price reduction and increasing promotion costs.
The company's share price has almost halved to the 20,000 won level for the past month, underperforming Kosdaq's 13.7 percent decline.
"The quarterly earnings report was quite disappointing. But it's simply because the company implemented much of its marketing expenses in the first half of the year," said Lee Shi-hoon, an analyst at Hyundai Securities. The total marketing cost is around 23 billion won, taking up 6 percent of the company's total revenue, according to analysts' estimates.
Still, Lee believes the stock is undervalued and put a "buy" recommendation on it with a six-month target price of 34,000 won.
"ReignCom's price cut may spark a price war and margin contraction across the MP3 player market," wrote Shin Min-seok at CLSA, who has lowered his rating on ReignCom to "underperform" from "downgrade."
Shin expects ReignCom's operating profit margin to drop to 16.8 percent in the second quarter from 19 percent in the previous quarter. CLSA also has a target price of 34,000 won, a nearly 50 percent reduction from its previous 65,000 won projection.
Executive optimism
The company executives are more sanguine. They believe margins could expand in the mid and long-run if chip prices continue to slide. Flash memory chip costs, which account for 35 percent of total costs, have fallen 25 percent since June and are expected to decline further.
Beginning July 19, ReignCom slashed the price tag on flash memory type MP3 players an average of 20 percent. For the most expensive models the discount was about 32 percent.
As brand and price are key determinants to purchasing MP3 players, Henry Kim believes deep discounts should boost demand for iRiver's greater memory MP3 players. The reductions on 512 MB and 1GB models exceed the lower-end 256 MB players.
"A shift to higher capacity products from lower ones will boost our sales mix," said Kim.
This year, the company estimates its profit will reach 60 billion won, a whopping increase from 40 billion won last year and 6.2 billion 2001.
ReignCom plans to roll out 12 music players this year, almost double the number of its competitors. Kim said the cross-border outsourcing has enabled the company to remain more agile to the rapidly changing MP3 player market, compared to its rivals.
The company develops its innovative MP3 technologies in Korea and manufactures in China. It also outsources the exterior product design to Inno Design based in California's Silicon Valley. Unique prism-style iRiver MP3 players which ReignCom rolled out in September last year is still gaining in popularity around the world.
Established by a group of engineers in 1999, the company of 460 employees has transformed itself from a start-up to the world's largest digital music-player manufacturer. Over the past few years, it has made significant strides on the global market, setting up five sales representatives worldwide, including in the United States, Japan, the European Union and Hong Kong.
ReignCom began to produce MP3 players under its brand name iRiver in January 2002. Before then, it supplied its MP3 products to U.S.-based SonicBlue in the form of original design manufacturing under the brand name Rio.
Overseas investors own 26 percent shares of the company. Yang, who founded the company with initial capital of 300 million won, is the largest single shareholder with a 23.5 stake in the company, followed by the second-biggest shareholder AV Concept, a Hong Kong-based electronics firm.
(jungmin@heraldm.com)
By Kim Jung-min
