Prices for liquid crystal displays (LCDs) will stabilize in the fourth quarter, but fall again next year as additional capacity comes on line.

Demand for LCDs likely will increase in the fourth quarter as demand for desktop and notebook computers, personal digital assistants (PDA) and cell phones—all users of LCDs—rises for the Christmas selling season.

While lower cost monochrome super twist nematic (STN) LCDs have been used in cell phones there will be a shift to higher cost thin film transistor (TFT) active matrix LCDs in cell phones. In addition, larger panel TFT displays will be used more in computer monitors as the price declines.

The overall market for LCDs will increase from $21. 9 billion in 2001 to $29 billion in 2002 as demand for panels continues to grow. Nine-inch and larger LCD panel will account for most of that revenue because they cost more than the smaller panels used in cell phones. A 15-inch panel used in a desktop computer monitor costs about $250-$270 while a 2-inch TFT LCD panel costs about $30. An STN panel costs only about $7.

While there will be a trend for more large panel TFTs to be used in computer monitors, buyers at cell phone manufacturers can expect more TFT displays to pop up on their bills of materials as well. "In Japan the entire market shifted from monochrome to color STN and then to color TFT," says Sweta Dash, an LCD analyst for iSuppli/Stanford Resources, a market researcher. Cell phone carriers in Japan have applications that require TFT such as streaming video and sending digital pictures via a cell phone, she says.

"North America is mostly monochrome STN, but there will be a slow shift to TFTs in the U.S. and Europe," she says. "3G (third generation cell phones) will help the movement toward TFT LCD."

Increased demand will mean that the LCD market will post solid growth through at least 2006 when the market will reach $52.6 billion. That is welcome news for LCD manufacturers who saw sales slump from $22.4 billion in 2000 to $21.7 billion in 2001.

"The LCD market suffered a lot in 2001. Prices started to fall almost in the beginning of 2000 and kept on falling throughout 2000 and 2001. It got so bad, many suppliers sold panels for 20-30% below cost as a result of an oversupplied market," says Dash.

Oversupply actually started to occur in 2000 when most electronics supplier had booming years. However, demand did pick up in the fourth quarter of last year.

"Monitor and consumer notebook demand picked up in Q4 but there was not enough supply because capacity was not added," says Dash. "Prices increased as strong demand and less than adequate supply continued until about the first half of this year."

Because of tight supply, buyers at monitor manufacturers and computer OEMs could not get the number of LCDs that they wanted. "They were getting 50% less than they were ordering so they started to double book," says Dash. But then toward the end of the first half, demand eased, inventories increased and prices started to decrease. Prices will likely continue to fall until the fourth quarter when demand will pick up. Prices will stabilize in the fourth quarter because of increased demand.

Buyers should keep a close eye on panel prices for 14 and 15-inch monitors. Reason: In August they were virtually the same at about $250. Prices for 15-inch fell faster than 14-inch panels, according to Dash.

She says the reason 15-inch panel prices fell faster is that they are used in desktop monitors and 14-inch panels are used in notebook computers. With desktop monitors, buyers have a choice of a 15-inch LCD monitor and a cathode ray tube (CRT) display. CRTs are less expensive. Because of that competition, prices fell at a higher rate for 15-inch panels. With 14-inch LCD panels, there is no competing technology so the price fell at a slower rate.

The good news for buyers is that prices will fall next year because additional capacity is coming on line. LG Philips has already added more capacity and Samsung will have another fab on line in October. In addition, Taiwanese LCD manufacturers will have new fabs in production next year.

Prices will fall about 5% in the first half. In the second half when extra capacity comes on line, tags should fall about 10%.

The price drops will occur despite growing demand for LCDs especially by monitor manufacturers. LCDs are replacing CRTs as the monitor of choice for computers.

By 2006, 75% of monitors shipped will include an LCD. Revenues for LCD monitors will increase from $6.2 billion in 2001 to more than $26.5 billion in 2006. Meanwhile revenues for CRT monitors will decline from $12.1 billion in 2001 to less than $7 billion in 2006, according to iSuppli/Stanford Resources.

"Demand for LCD monitors has been increasing tremendously," says Rey Roque, vice president of marketing for digital information technology division of Samsung Electronics. "At the end of last year we pegged growth at about 6 million units for the U.S. and we have revised that to 7.5 million and we think it will be higher than that," he says.

The reason for the growth is that people are seeing the benefits of LCD monitors over CRTs. "There's a higher initial cost, but LCDs have the potential for longer life, there are energy and space savings and the LCD monitor footprint allows for greater flexibility especially for business uses."

He says LCDs provide a clearer picture than CRTs. There is no flicker or distortion over time. "LCD panels have fixed pixel resolution. If you run it in that native resolution, you have a crisper picture," says Roque. "For basic office use, text looks good. In addition they use only 25% of the power that CRTs use."

They also last longer. A CRT will last 10,000 hours while TFT will last 25,000 hours.