The MP3 Youth Movement

Brandweek, July 3, 2000 by Todd Wasserman

CE companies are pushing digital audio players for their 'coolness' as much as their profit margins.

Being first to market is never easy but if you're lucky like S3, you'll get sued before your product ever hits the shelves. The Recording Industry Association of America (RIAA) and the Alliance of Recording Companies (ARC) tried to use the courts to squash S3's Rio device in late 1998. The two organizations were up in arms because Rio, a handheld device that played CD-quality digital music files downloaded from the Internet, posed a grave threat to their business.

The RIAA and ARC were worried that users would be able to make copies of copies of music without a loss of quality, a feature that would turn every user into a potential music factory. That feature was never available on the original Rio device, so the courts ruled in S3's favor. In the process, the company reaped the benefits of tons of free publicity. "It gave us a lot of pent-up demand," said Mike Reed, director of marketing for the Rio audio group of S3, Vancouver, Wash., known at the time as Diamond Multimedia.

Since Rio's introduction, S3 has sold more than 500,000 units, making the company far and away the leader in the fledgling digital audio players (DAPs) category seen by the consumer electronics industry as The Next Big Thing.

S3, which relies on minimal advertising, mostly via the Web and some college-focused street teams, models itself on the original equipment manufacturer (OEM) strategy used by Intel or Palm, rather than a product-based CE stalwart like Sony or Philips. The company recently announced it would make pen-size devices for Nike, which will have a small S3 branding tag and which the sneaker company would market to exercise enthusiasts looking for a digital player that won't skip when jostled. The Nike relationship, said Reed, will be "the first of many."

The company's low-key marketing strategy is about to be sorely tested, as virtually all the top-name consumer electronics companies get ready to release and promote their own DAPs this year, aiming the devices squarely at Gen Y, the cohort of 60 million tech-savvy Americans born between 1979 and 1994.

It all started last fall when Thomson/RCA broke a $20 million umbrella campaign which featured its Lyra DAP. Last month, Sony broke a $30 million TV and print campaign via Young & Rubicam, New York, for a digital audio update of its 20-year-old Walkman. Dutch giant Philips is preparing an umbrella campaign, via Messner Vetere Berger McNamee Schmetterer/EURO RSCG, New York, spotlighting its Rush DAP as one of its star products.

This fall, Samsung will unveil an ad campaign for its Yepp DAP and, according to digital marketing manager Russell Bleeker, is looking into bundling Yepp with a name-brand PC maker, possibly Apple's iMac. Panasonic is also planning to release a device for later this year. And other companies outside the consumer electronics space, including Sega and Compaq, are formulating their own digital audio devices.

Microsoft, meanwhile, is positioning its Windows Media Player software as a recording industry-friendly alternative to MP3, which has achieved such prominence in the category that many still call the devices "MP3 players: The Redmond, Wash., software giant is planning its first large marketing effort for the format (in its Windows Media Player 7 incarnation) this summer and will support a 26-city mall tour with I-Jam Multimedia, Schaumburg, Ill., which is marketing a Win-Jam portable DAP/FM music player, as well as Thomson and Hewlett-Packard.

The presence of big names seems to secure that the category will be huge, but there have been some well-publicized challenges to downloadable music before it has even begun in earnest. After RIAA sued it in January MP3 removed all major label content from its Web site. Last month, MP3 settled with BMG Music and Warner Bros. Records. The major labels have yet to resolve their differences with Napster, a leading music download site, which is facing legal threats from artists like Metallica and rapper Dr. Dre.

Meanwhile, DAP unit sales are only in the five-figure range for the year, with a big chunk of that from online merchants, according to Roger Lanctot, research director for PC Data, Reston, Va. At retail, they are practically invisible. "They're definitely not in any major volume: said Jackie Trilling, vp-marketing for DataVision, a New York retailer. "I don't get it."

The devices also take 10 to 20 minutes to download a three-minute song over a standard telephone connection, while songs legally available currently are mostly from little-known bands, limiting the devices' appeal to an 18-to-24 demo. And the flash memory storage medium is expensive: 64 MB, enough to hold about 80 minutes of music, costs $129. The lack of a software standard also makes DAPs a complicated sell. "When you've got too many [software] choices, you don't want to buy the wrong one," said I-Jam president Doug Marrison.

In fact, few in the industry are claiming that DAPs, which range in price from $99 to about $400, are going to be instant cash cows. Jupiter Communications, New York, projects an installed base of just 5 million by 2003, versus the current 110 million for PCs. Like other consumer electronics products, the MP3 player is also likely to be a commodity within a short time. "It will be a razor/razor blade model," said Aram Sinnreich, a Jupiter analyst, though the "razor blade" part is currently in doubt.