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New players spur MP3 growth - music industry

Rarely has a new technology generated the kind of interest and controversy in just a few short months that MP3 has. With just a single CE product currently in the marketplace, the concept of downloading music from the Internet has captured the attention of the press and raised questions about what MP3 means for retailers, and more importantly the question of how the industry can best take advantage of this new craze.

MP3, a computer file format for audio, allows music to be uploaded onto the Internet in a compressed form and then downloaded, stored, shared or listened to mainly from a computer. College students have known about it for years, and until recently MP3 remained largely in the domain of the young and technologically savvy. But Diamond Multimedia changed that in the fourth quarter of 1998 when it launched Rio, a portable stereo that freed the MP3 file from the computer and allowed the user to listen to MP3 music on the go. The introduction of the Rio was initially blocked by the Recording Industry Association of America (RIAA), which claimed the product violated the 1992 Audio Home Recording Act.

But Rio was released all the same, and it has landed in the middle of the spotlight that is focused on all things Internet related. Circuit City proudly showed off the product last fall at a new store opening in New York, and Best Buy reported selling through its entire product allocation in December, the first full month of Rio's availability

"We see MP3 as one of the biggest applications we've come across in a long time," said Bob Gundersen, merchandising manager for computer peripherals and accessories, Best Buy. "We're pretty excited about it."

Best Buy internally classifies MP3 as a computer peripheral, and as such it is merchandised in that department. When the Diamond Rio first came out nearly six months ago, the chain displayed it under glass next to other peripherals, but it recently moved it to a dedicated endcap. And with more product in the pipeline, Gundersen expects to have a broader assortment or at least an additional three or four skus by fall.

Diamond's original model offers 32 megabytes of storage, which can be augmented with additional space by purchasing removable media in 16- or 32megabyte increments, and a new model with 64 megabytes of onboard flash memory began shipping last month. LG Electronics has developed the MP Free, a portable MP3 player but has not announced a product launch, and Empeg Ltd. will soon release a car audio product that plays MP3 compressed music.

Microsoft last month announced the launch of Windows Media Technologies, a program that actually utilizes MP4 technology, which has higher compression than MP3 and affords some copyright protection, thus alleviating piracy fears raised by the music industry.

Casio has just begun shipping the E-100, a handheld Windows CE-based personal digital assistant (PDA) that will support the Microsoft program and its multimedia applications. The product will also be the first PDA to feature stereo output.

Microboard Technologies began shipping PlayWrite MP3 last week, a bundled product geared at transferring MP3 formatted music onto a standard CD. PlayWrite features a CD-rewriteable drive and two software products that allow users to record customized CDs in less time and fewer steps than it takes to download and transfer MP3 files, thus bringing the technology more in reach of the mainstream consumer.

"We're getting tremendous interest, before we've even started shipping," said Chuck Alcon Jr., vp, sales and marketing for Microboard. Primarily, this interest is coming from specialty audio dealers, but with a $399 SRP, the product seems well suited to the mass market.

In fact, Best Buy claims to have captured nearly 41% of the MP3 market share with sales of Rio, according to PC Data, Gundersen said. The retailer has also noticed some interesting add-on sales that appear to be directly tied to MP3.

Consumers are buying additional hard drives in conjunction with MP3 players, said Gundersen, with a high attach rate of CD audio purchases, as well. As consumers become more immersed in downloading music, the additional hard drives serve as digital jukeboxes to store songs.

Meanwhile, consumers continue to be inundated with information about MP3 and related products. And retailers should be prepared to respond. Diamond has managed to create a huge amount of consumer awareness that was ironically helped in part by the RIAA's attempts to block the Rio introduction.

"Obviously, the lawsuit generated a lot of PR for us," said Bob Nelson, on-line marketing specialist, Diamond. "There's been a tremendous ground swell of interest in MP3."

"It's a daily conversation for me," said Bob Smith, product manager, handhelds, Casio. "The interest grows daily."

Smith pointed out that even though product introductions such as Rio have done a good job of promoting MP3, "the Internet music-type thing is new to a lot of retailers," he said. "It's so new, so revolutionary, they're not sure where it's going to go at this point." Retailers should be at the ready with answers to consumers' questions and display product in a cohesive manner, preferably on an endcap, Smith said. As interest and availability grows, so should sales.