Fruits of the MP3 Market

By Suzanne Deffree -- Electronic News

Never doubt how much impact a PC maker can have on the consumer electronics market.

When Apple Computer released its iPod MP3 player in October of 2001, it entered uncharted territory. The small, sleek and sometimes colorful devices, once thought to be a fad, are now a high growth consumer electronic device -- one that saw more than 2 million shipments last quarter, a 500 percent year-over-year gain, versus a 6 percent gain for the Macintosh computer maker's Q3 CPU shipments -- and has spurred a portable music player revolution not seen since the first days of the Sony Walkman. Indeed, the market is among the top three consumer electronics markets right now, according to Paul O'Donovan, principal analyst in Gartner's semiconductor group.

"[The mp3 market] is going really, really well," O'Donovan said, attributing the market's success to the iPod. "I put the success of iPod really more down to its industrial design. It's really a cool looking product. The great thing about iPod is it had the ability to download music from various sources and that was a differentiator from the jukeboxes that came before it. It also used a different sized drive, which enabled it to be small and neat looking."
iPod's Competition

The market has grown from one solo fruit tree to an entire orchard of players – Creative, Sony, Dell and Hewlett-Packard all have MP3 players to market. Motorola, which is said to have plans for the MP3 player market, for now has announced its intention to include MP3 capabilities in phones next year.

"You have all these other companies – not only traditional consumer electronics companies, rather more companies that have been playing in the PC market. [MP3 players] are not PC products, they are consumer products; it's that bridge," O'Donovan said.

Meanwhile, Apple's influence has not dissipated; in fact, Sony recently changed its ATRAC3 format to more closely resemble the iPod's MP3 drag-and-drop download format. But the two are joined by a host of other non-traditional CE players that bring a different flavor to the table.

"The interesting thing about these PC manufacturers is if there is one thing they bring to the PC market, it's connectivity. That's one thing that the consumer electronics guys are quite a bit behind on," the Gartner analyst remarked.

He noted that when the iPod first hit shelves, they could only run with a Mac and Apple's iTunes, a big discriminating factor against it in the PC-populated marketplace. IPod also relied heavily on Napster for downloads, which at that time was under legal fire by the music industry. Now companies like Creative tag team with Microsoft and its recently announced MSN Music service for customer download capabilities, while Apple has its iTunes online library with more than 125 million songs downloaded to date.




Turn Up the Volume

The iPod brand and look has gained a recognizable presence that has yet to be achieved by other MP3 makers. That may be why HP decided to partner with Apple on PC-friendly iPods. But branding isn't everything, says O'Donovan, and in the CE world of small margins volume is what will count.

And chip players have set out for volume. In recent weeks, several semiconductor companies have announced new chips squarely aimed at the MP3 market. NEC last week launched three single chip melody LSI solutions, which the company claims are the first to support MP3 and advanced audio coding playback for mobile phones. SigmaTel closed a deal with Degen Electronics to include its MP3 controller technology for its latest hard-drive MP3 player with an embedded FM transmitter, aimed at the China market. And CE chip company Oki this week announced it is sampling its latest MCU based on the ARM9 processor targeting the MP3 player market.

"We are very interested in the MP3 player market," David Glavin, director of marketing at Oki, said, noting the volumes involved. "We see that as a very key market – not just the MP3 players themselves, but also all of the different add-on areas that you'll find are picking up MP3." Glavin pointed to car radios adopting MP3 capabilities, as well the growing cell phone market.

Motorola, for one, is already planning its moves in MP3 cell phones. The company announced in July that it and Apple had teamed to make a new iTunes music player standard on all of Motorola's mass-market music phones expected in the first half of 2005.

Download Dollars

The market has also opened service opportunities for companies like Apple, Dell and Microsoft that can profit from downloads. The NPD Group puts Apple's iTunes service in the lead, claiming about 70 percent of music downloads with the number of consumers paying for music downloads coming in at about 1.3 million.

"Our research suggests that at this stage of the business it's not so much about building share as it is about creating demand for paid downloads universally," said Russ Crupnick, VP of the research house, based in Port Washington, N.Y. "The overriding challenge for paid music download services is to first make the concept enticing to a wider audience and then to build loyalties to a specific service."

Building demand for paid music download services requires even greater investment in consumer promotion, as well as broadening partnerships with traditional music retailers and consumer goods companies, Crupnick added. "We've seen that promotion works, but it's had a short-term effect so far, which is typical for traditional consumer goods. The trick is in phasing promotions, so that there is a cumulative positive effect on the target market."

What's in Santa's Sack this Holiday

Apple's up to its fourth generation iPod this holiday season. The latest from its MP3 player line is available now in a 12-hour battery life 20GByte and 40GByte model, priced at $299 and $399, respectively. As always, Apple products are only available through Apple stores, authorized resellers or online. HP's joint iPod through its partnership with Apple has the same specs as the fourth generation iPod, but is available through retail outlets like Fry's and Best Buy.

In mid-October, Creative announced its Zen Micro, a 5GByte MP3 player that is 6mm smaller than the iPod and leans toward the PDA spectrum with a built-in address book, calendar and to-do list. Zen Micro also comes with a 12-hour battery life and is available now for preorder at a price of $249. Creative expects to have the player in stores in time for holiday shoppers.

Dell's DJ MP3 player claims up to 20 hours of battery life on its 20GByte model at a price of $279. Dell also has lower storage models that start at the sub-$200 point. Sony has products starting at that price point that continue to range up to $499. At the highest level, Sony offers 40Gbytes of storage, which the company says will store up to 26,000 ATRAC3 tracks with 20 hours of battery life. Products out now that support the MP3 player format top out at $399 and also cover Sony's ATRAC3 format.