The Digital Audio Market

Electronic News, May 17, 1999 by Michael Paxton

While the $12 billion recording industry is engaged in a mighty struggle with digital compression technologies, the portable digital music devices at the center of the controversy have become increasingly popular. There are several portable music devices on the market, but the best known is the Rio PMP300, a Walkman-like device manufactured by Diamond Multimedia. Since these devices need microcontrollers, MPEG audio decoders, and an increasing number of flash memory chips, this product segment can offer an attractive niche market for semiconductor vendors. We fully expect this market to experience a growth spurt over the next five years. By the year 2003, we forecast that annual revenues for portable digital music devices will reach $800 million.

When it comes to finding something to listen to, for today's computer- savvy audiophiles there are more choices available than ever before. This is due, of course, to the Internet. With more and more users surfing the Web each month, people are discovering that they have the ability to digitally record, copy, and pass along thousands of musical selections. Compression formats like MP3, a2b, and Liquid Audio have given music lovers a great way to record and then listen to CD quality music, without actually paying for the CD.

This last point naturally has upset the recording industry. Led by the Recording Industry Association of America (RIAA), the industry filed a lawsuit last December to stop the distribution of the Rio PMP300 on the grounds that downloaded MP3 files often were illegal pirated recordings of copyrighted material. The attempt to stop the Rio failed, but the group did focus attention on the important issue of intellectual property rights in regard to digital content reproduction.

Adopting a new approach, the RIAA launched the Secure Digital Music Initiative (SDMI) in late December. The SDMI is an effort to develop a secure system for distributing digital music that is acceptable to the many companies involved in the recording and transmission of digital music. So far, several systems have been proposed, but with companies like IBM, Sony, Microsoft, Universal, and Warner Bros. all proposing different solutions, progress has been slow.

In addition to portable digital audio devices, digital music security issues also apply to home stereos and desktop PCs. However, the RIAA recognized that due to the popularity of portable music devices, SDMI guidelines needed to address them first. In addition to Diamond Multimedia's Rio, since the first of this year Samsung and Saehan both introduced MP3-based products. Lucent and TI also have plans for players.

Consumers certainly haven't been waiting on the SDMI standards. Since the Rio went on sale last December, Diamond Multimedia has sold over 200,000 units. Over the next year, we expect total sales of portable music devices to slow with the SDMI standards. However, once the standards are implemented, we expect a rapid increase in unit sales.

Michael Paxton is an industry analyst for Converging Markets & Technologies at Cahners In-Stat Group, located in Scottsdale, Ariz.