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Why Is Hi-Fi Gear So Darn Expensive?!

Why Is Hi-Fi Gear So Darn Expensive?!

We get letters to the editor on a regular basis complaining in some way that audio equipment is frightfully expensive or that we review too much expensive gear or that expensive gear is a rip-off. I presume this is mostly an emotional issue, and, seeing as I have essentially no control over reader emotions, there isn’t much to say.

At the margin, though, most of our staff would like our fellow audiophiles to be happy. As a result, RH particularly makes some effort to explain what is going on. RH is a reasonable and thoughtful guy, so he gives reasons — most often for why we cover very expensive gear, but sometimes for why gear seems to be more expensive than in the past. I will make my attempt here to add to what RH and JV and others have said.

But before embarking on that, let me return to the large element of this which is a fool’s errand. If the feeling that audio equipment is too darn expensive is emotionally-driven, reason probably isn’t going to change much. It seems to me that if we try to steel-man the argument it could be any of these:

• Rip-off 1: I don’t believe that the mega-priced equipment sometimes covered in The Absolute Sound is really any better than equipment that costs 1/10th or 1/20th as much

• Budgetary Frustration: I acknowledge that mega-priced equipment is better, but it costs so much more that it bothers me a lot (presumably because I value the incremental performance but can’t afford it).

• Rip-off 2: While I acknowledge that the mega-price equipment of 2022 is relatively excellent, the parts in the product can’t justify the price, and so I believe the best could be made more affordable (and then I could have it).

Rip-off 1 seems like it would have limited emotional traction. If someone opens a hamburger stand and charges $50 for the equivalent of the Big Mac, it simply doesn’t matter because the value proposition is stupid. Budgetary Frustration seems emotionally powerful, but really requires some general anger about the world as we know it (better houses, better cars, better food, etc all cost more than lesser options). That really isn’t within the scope of The Absolute Sound.

Rip-off 2, however is interesting. If true, something would seem to be amiss. Of course, one option is to explain that if a designer can create a uniquely valuable product, and others can’t do that, then he/she is entitled to charge what the market will bear. Like art. Price elasticity often means that such a valuable product, if its value doesn’t depend on rarity and if it has low production costs, will do better if priced aggressively (more total margin is generated  when priced lower, to a point). This logic makes me suspicious of the likelihood of Rip-off 2. But, there could be conditions where high prices are the profit-maximizing approach. And, since companies have to pay a return on capital to their investors, approximate profit-maximizing is an ethical obligation as things stand.

But, there is another reason I am suspicious of Rip-off 2 thinking. Rip-off 2 thinking hinges on logic like “that $50,000 product can’t possibly have parts costs that justify that price.” I am skeptical of this because I doubt many audiophiles really know what parts cost at the complete Bill of Materials level.

Why Is Hi-Fi Gear So Darn Expensive?!

But, even more, this Rip-off 2 logic seems to assume that products are just piles of commodity parts that you are buying. This is simply not the case. Audio gear is somewhat more like software and less like a standard bar of 4130 chromoly tubing. In software, the cost of the physical product (some encoded electrons) is close to zero. What you are paying for is marketing and distribution and manufacturing and intellectual property and cost of capital. These are mainly not physical items, but they are costly. And, I want to argue, intellectual property (R&D and engineering and testing) in audio is especially valuable.

Why Is Hi-Fi Gear So Darn Expensive?!

I recently heard a small 2-way stand mount speaker at a show. The sound was excellent. The product was priced at $50,000 or thereabouts, per pair. Allowing for distribution and marketing leaves about $25,000.  Add management and cost of capital, that leaves maybe $12,500 per pair for parts and assembly and engineering. Say the cost of parts was $5000 and assembly was $2500. Could engineering realistically cost $5,000 per pair? Well, in this case the company designed the drivers as well as the cabinet and crossover. So, let’s say it took a team of 10 people over the period of 2 years to do the design. If the people on the team average $100,000 in salary and benefits, then it cost $2 million to do the design. If the company sells 125 pairs per year over 3 years (375 total), then the engineering cost a little over $5000 per pair.

The point here is two-fold. One is that the reality of product manufacturing means that parts costs are often something like 10% of MSRP without any company making outsized profits. That surprising number is part of what throws people off in assessing the rip-off factor. And, point two is that in a niche business like high-end audio, it isn’t that hard for engineering to be equal to or greater than parts costs. You can’t see that, but my experience is that you sure can hear it.

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