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How the global chip shortage could ruin Black Friday

The consumer electronics industry continues to face supply chain issues for smart speakers, streaming devices and more.

Store aisle with empty shelves

All signs point to further supply chain troubles in the second half of the year, which could have a noticeable impact on the holiday shopping season.

Photo: Smith Collection/Gado/Getty Images

Sonos fans have to be patient these days. The smart speaker maker's web store currently lists most products on backorder, including the recently introduced Sonos Roam. Prospective Roam buyers are being asked to wait up to a month; the company's Amp product won't ship until mid-August.

"We are seeing significant increases in constraints on a variety of components," warned Sonos CFO Brittany Bagley during the company's earnings call last week. "There's a general semiconductor shortage out there, and everyone is trying to figure out how to get their components in the volume that they need," she added. "We're in the same place as the broader industry."

Global semiconductor shortages have been in the news for months, with the pandemic wreaking havoc on supply chains. But while much of the coverage has focused on the automotive industry, it's increasingly affecting a much broader range of consumer electronics, including game consoles, smart speakers and streaming devices.

"It's going to affect pretty much everything," Parks Associates Senior Analyst Paul Erickson told Protocol.

It may take a while longer until the effect on the industry becomes apparent to many consumers. Popular streaming sticks remain in stock at major retailers, and both Amazon and Google seem to have no trouble getting their speakers out the door. However, all signs point to further supply chain troubles ahead in the second half of the year, which could have a noticeable impact on the holiday shopping season.

"We expect supply chain constraints to persist for the rest of the year, and costs in components and logistics to correspondingly increase as the year progresses," warned Roku in its letter to investors earlier this month. That's a view shared by Bagley, who told investors that "the global supply situation has only gotten more challenging as we look towards the second half of the year."

Roku and Sonos can be seen as canaries in the coal mine for the broader market for streaming devices and smart speakers. Their biggest competitors, Amazon and Google, don't break out unit sales and revenue numbers for hardware products during quarterly earnings calls, in part because hardware is such a small part of their overall business.

That's a different story, though, for Roku and Sonos, which is why investors and analysts paid close attention when Roku executives recently forecast that rising component costs may lead to negative gross profit margins for its hardware products starting this quarter.

Selling devices for less than what it costs to produce them is illegal if done to force out competitors. If prices for components go up across the industry, companies could reasonably argue that they are just responding to the market. Still, losing money on hardware may not be good business in the long run.

As a result, companies could decide to raise prices when new devices are introduced in the fall. "Smart speakers and streaming devices may see price bumps at the entry level, where margins are slim," Erickson said.

Alternatively, companies may simply decide to ease up on holiday promotions, especially around big shopping events like Black Friday. Erickson said that retailers will likely still offer doorbusters. But for many products, price cuts may not nearly be as steep as in recent years. Instead, companies may offer a couple of months of free access to their paid services to customers who buy their hardware. "We are going to see some creative promotion and bundling to continue to move product," Erickson said.

Some companies have already begun to dial back promotions. Louden told investors that Roku ran fewer promotions during the first three months of the year due to "tight inventory related to supply chain disruptions."

Those disruptions may continue until next year, TSMC warned last month. Already known as one of the world's largest semiconductor manufacturers, the company now wants to respond to rapidly growing demand with new manufacturing facilities in the U.S.

A more-diversified supply chain may be one of the silver linings to come out of this crisis. Sonos already began moving some of its manufacturing to Malaysia in response to tariffs on Chinese exports. "It's a big investment to make this happen," Sonos CEO Patrick Spence recently told Protocol. "But in this environment, it really pays off."

Spence also said that the current shortages won't result in any fundamental changes to the company's business, and expressed optimism that the company's customers would be willing to wait a few extra weeks. "We are seeing incredible strength in terms of those orders," he told investors. "People do not come back and cancel."

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