July 5, 2005

Digital play-as-you-go system keeps growing

By Antony Bruno

LOS ANGELES (Billboard) - Several recent market studies byindustry analysts suggest the demand for portable digital musicplayers is poised to skyrocket this year, reaching the criticalmass needed for online music services to thrive.

A recent report from analyst group In-Stat forecasts thatthe market for hard-drive devices and flash-based devices willreach more than 104 million units worldwide by 2009, comparedwith the 27.8 million on record for 2004. It also notes thatMP3 player sales reached $4.5 billion worldwide last year, anincrease of 200% over 2003.


The U.S. market is contributing heavily to theseexpectations. In the States alone, 25% of the respondents toIn-Stat's 2005 consumer survey acknowledged owning an MP3player, up from 16% in 2001. Jupiter Research, in an April 2005report, found that U.S. shipments of MP3 players more thantripled in 2004, and expects that figure to increase again by35% in 2005.

Jupiter predicts the U.S. MP3 market to achieve a compoundannual growth rate of more than 10% through 2010, reaching aninstalled base of 56 million, from 16.2 million in 2004.

Apple Computer's iPod energized the MP3 player market withlarge-capacity, hard-drive-based models. But lower-costflash-based devices are seen as the future category leaderdriving growth. Jupiter expects shipments of flash-baseddevices to exceed that of hard-drive models starting in 2007.

Providers of portable subscription services, such asRhapsody, Napster and Yahoo, are watching this flash MP3 playergrowth most closely.

"As more devices come out that are compatible with portablesubscription services, especially flash devices, it can onlygrow the market," a Rhapsody representative says. "Right now,there's not a lot of very low-cost portable music playerscompatible with (portable subscription) services. We think whenthere's a wide variety of devices at a wide variety of prices,from $50 to $400, then the portable subscription servicesmarket will mature as well."

This proliferation of digital music players available at arange of different prices is expected to spur sales of online ala carte downloads and music subscription services. At the sametime, the growth of digital music sources increases the demandfor MP3 devices. It is a feedback loop that analysts say isnecessary for the market's expansion.

"The two do co-exist. I would consider one the driver ofthe other," In-Stat analyst Stephanie Guza says.

The problem with this business model is that many MP3owners fill their devices with music ripped from existing CDsor with tracks obtained from file-sharing sites. According tothe NPD Group, 243 million songs were downloaded from variouspeer-to-peer services in March, while in the same month only 26million were purchased from digital music stores.

However, NPD research also suggests that legal music storeslike Apple's iTunes, Napster and RealNetwork's Rhapsody may beclosing the gap with P2P sites.

According to the March 2005 MusicWatch Digital Servicesurvey, iTunes tied with P2P site LimeWire as thesecond-most-popular online music service, at 1.7 millionhouseholds each. First place went to P2P site WinMX with 2.1million households. Also in the top 10 were Napster (seventh)and RealNetworks (ninth).

Record labels are reporting an uptick in digital musicsales as well. In its second-quarter earnings report, WarnerMusic Group claimed digital revenue of $35 million, or 4.5% oftotal revenue, up from $25 million the previous quarter andgreater than the $32 million claimed for all of last year.

Still dominating the MP3 player market is the iPod and itsmany iterations. How long Apple can maintain this lead in theface of increasing competition and a rapidly growing market isa question everybody is asking. Most analysts predict therewill not be any significant challenge for at least the next twoyears.

To date, competing MP3 players have tried to match orexceed the iPod's stylish design. But there are signs thatphysical appearance will soon give way to user interface as theprevailing differentiator, excluding, of course, price andstorage capacity.

"It's hard to differentiate by design," Joon Yang, CEO ofReigncom -- the South Korean company that manufacturers theiRiver line of MP3 players -- told reporters in Seoul in June."Why do we need control buttons? Controls are ugly, so if it'spossible to eliminate them and use the display," he said itshould be done.

The company's new U10 model, for instance, replaces controlbuttons with a pressure-sensitive display panel navigationsystem called the "D-Click."

But an increase of MP3 players can only help the digitalmusic service market grow so far. According to a ForresterResearch report, the car stereo remains the single mostfrequent place people listen to music, at 56%, followed bypersonal and home stereos at 27%. MP3 players come in last, at1%. So digital music receivers like the Roku Soundbridge or theSonos system that stream digital music from the PC areconsidered equally important over time.

"I don't think it's only a portable market," the Rhapsodyrepresentative says. "The combination of new devices and thisnew model gives consumers the ability to hear any song theywant when and wherever they want. That is what is going to makethe difference."