In a typical knee-jerk reaction, Wall Street last week sent the share prices of William Demant, Sonova Group and GN Store Nord tumbling following the FDA’s approval of the new Bose hearing aid. In my humble opinion, the investor herd made exactly the wrong call on those hearing-aid makers. In fact, now might be the right time to consider “buying the dip.”
Sure, the new Bose hearing aid is a game changer for the entire industry, as I reported after the announcement. And sure, conventional wisdom might hold that a new competitor capable of offering great products at new, low prices should depress the value of the existing players in the market. But if I’ve learned one thing in more than a decade of following the hearing aid business, it’s that there’s nothing conventional about it.
In fact, the entry of a major consumer electronics company into the hearing aid business—especially a global “cult brand” like Bose—should be great news for those three publicly traded companies, along with many other established players in the hearing aid industry. Let me give you three reasons why.
- There are now two markets for hearing aids—a “premium” market and an “economy” market.
In the past, there were only premium hearing aids. The “Big Six” manufacturers that dominated the industry for the most part developed expensive solutions for patients with significant hearing loss. The more severe the loss, the more profit the hearing aid manufacturers stood to make from the sale.
Until very recently, it was simply too expensive to create an “economy” market for hearing aids with low-cost, high-quality solutions for people suffering from mild, age-related, high-frequency hearing loss. Now those lower-priced solutions are here, and that’s the market the big consumer companies will target with more affordable hearing aids.
- The “Big Six” hearing aid companies will defend their premium-market dominance.
Bells and whistles required for premium hearing aids aren’t cheap or easy to develop. The hearing industry’s “Big Six”—the three publicly held companies along with privately held Starkey, Sivantos and Widex—currently sell approximately 80 percent of the world’s custom hearing aids. They have spent decades perfecting the technologies and delivery systems to support patients with moderate-to-severe hearing loss. Their high-end products are mostly custom solutions that don’t lend themselves to mass, consumer-electronics pricing or marketing.
Supporting customers with moderate-to-severe loss also requires a complex supply chain, with a global network of audiologists and other trained professionals helping patients adjust to their hearing aids and cope with their hearing loss. Big consumer electronics companies aren’t positioned to provide that level of support and probably won’t want to.
This premium market isn’t going anywhere. It may only continue growing at somewhere in the range of five percent per year, but it should continue to be a reliable cash cow delivering strong margins for the Big Six.
- If Bose helps create the mass “economy” market for hearing aids, the “Big Six” are well-positioned to cash in on it.
The economy market for more affordable, high-quality hearing aids is new and open to all comers—including traditional high-end hearing-aid makers. It will feature products based on low-cost commodity components and standardized “self-fit” software. Because mild, high-frequency hearing loss afflicts a very large percentage of the aging population, it’s a huge potential market where “one-size-fits-many” solutions are possible and where economies of scale can come into play. Bose and other consumer electronics companies can be expected to attack this market head on with affordable products.
However, the established hearing aid companies will be able to compete in this market as well. They know what it takes to put together very low cost solutions with standard, low-cost chip technologies and more standardized, lower-cost versions of their fitting software. They also already understand the ins and outs of Bluetooth integration with phones and other devices—a not insignificant development challenge with a learning curve the consumer electronics companies will have to climb. What they lack in global consumer marketing heft and mass-production scale they may make up in leading edge product development.
High-end hearing aid products and technologies are a great investment opportunity.
After the Bose announcement drove down the share prices of Sonova, William Demant and GN by 10 percent or more, last week’s global stock market slump pushed them even lower. So now may be a good time for public-market investors to take a closer look at them. Bose and other big players—Samsung and Apple have active hearing-aid R&D programs—have the clout to jump-start much faster growth in the global market for all kinds of hearing aids. And the established players stand to benefit from that growth.
At the same time, private-equity investors have even more options to investigate. Starkey is a closely held American company, but Sivantos was created after a private equity group acquired the Siemens hearing aid business, and now that company is attempting to fund a merger with Widex. If one big private-equity player strikes it rich in the premium hearing aid business, don’t be surprised if others train their sights on it.
And those are only the “Big Six” in the premium market. Look a little closer and you will see a cauldron of activity in the incipient economy market for hearing aids. As big players like Bose validate this market, we can expect to see tens of millions of dollars of venture capital funding startups leveraging new technologies to carve out their share of a rapidly growing global market for affordable hearing aids.
Harvey Sparks says
Knee-jerk reaction is right! All investor reports made at the time of the initial OTC announcements indicated little long-term disruptions to the premium hearing aid market. This was due, in part, to the essential nature of the service provider in the successful use of hearing aids. I am sure the next round of reports will indicate strong buy positions!
Abram Bailey, AuD says
Timely article David. Investing in Phonak’s parent company (Sonova) would seem like a wise decision at this particular point in time. They are cheap after the Bose announcement and just announced a true Bluetooth hearing aid with rechargeability and the ability to be programmed remotely from anywhere. Pretty much everything consumers have been asking for. Check it out: https://www.hearingtracker.com/phonak-launches-first-real-bluetooth-hearing-aid