Digital audio products thrive after napster

Electronic News, Nov 19, 2001 by Mike Paxton

THE MP3 REVOLUTION SHAKING UP THE recording industry is also reverberating in the consumer audio electronics market, prompting manufacturers to introduce a host of products and features. Despite the legal wrangling over copyrights and online digital music distribution, interest in digital audio playback applications and products has risen sharply over the past few years.

Portable digital music players--often called MP3 players after a popular audio format--such as Sonicblue Inc.'s Rio product line continue to be the most popular of these devices. But other products such as digital audio receivers and jukeboxes for the home, automobile stereos, cell phones and even PDAs are incorporating digital audio technology, too. Most of these products have only been available for a couple of years but have still sold millions of units.

The market for portable players, in particular, will continue to expand rapidly from $532 million in 2000 to more than $1.3 billion in 2005. Demand for digital audio receivers--products that rely on a PC for file management and to download Intenet content--and digital audio jukeboxes, which have built-in file management and storage capabilities, has been tepid so far. The appeal of both, particularly jukeboxes, will rise as prices drop over the next few years. Digital audio jukebox sales will rise from about $38 million in 2001 to $784 million in 2005 according to In-Stat/MIDR forecasts.

Digital music playback for automobile stereos, cell phones and PDAs are just becoming available and will take a few years to make an impact. Still, digital audio device markets provide attractive opportunities for component makers in the semiconductor industry, and for those in flash memory, hard disk drive and other storage media markets.

Semiconductor manufacturers Cirrus Logic Inc. and Texas Instruments Inc. are helping to fuel the digital audio craze with chipsets that offer low-cost digital music processing. Both companies have already developed 3G processors for portable players. These integrated chips are designed to both reduce portable product costs and to increase the battery life of previous-generation models. Reducing cost through integration of functions remains a top priority for chipmakers in this market, but providing manufacturers with the ability to add optional features for higher-margin products is also a major objective.

Embedded flash chips and flash cards are key components in the portable player market, and fortunately for digital audio consumers, flash memory prices declined significantly this year. This decrease made products much less expensive, driving higher unit shipments, but it limited growth of worldwide portable player revenue to a paltry 2 percent. However, unit shipments should rise fast enough over the next several years to offset further revenue reductions caused by any further flash memory price reductions.

We expect that Sonicblue will retain its lead in the portable player market this year with around 20 percent of total worldwide shipments. Creative Labs and D-Link will likely take the silver and bronze. It is important to note that Intel Corp., which leapt into the top 10 this year, announced in October that it would phase out its Connected Products division, the group that manufactures its division's markets. The company will continue to sell its existing inventory of portable digital music players but will cease further manufacturing.

In-Stat/MDR fully expects the global portable digital player market to continue to grow as the number of people with Internet access--particularly broadband access--increases. Over the next several years, we also expect many other products featuring digital audio technology to receive a similar boost, although it may take several years before the impact is clearly visible.

Mike Paxton is a senior analyst with Cahners In-Stat/MDR (www.instat.com) based in Scottsdale, Ariz. He can be reached at mpaxton@instat.com. Cahners In-Stat/MDR is owned by Cahners Business Information, the parent company of Electronic News.