In 1998, the era of MP3 portability began with the introduction of the first headphone stereo that used solid-state flash memory to store and play compressed MP3 music files, either downloaded from the Internet or “ripped” from a music CD.

Today, the MP3 phenomenon has exploded, changing the way consumers consume music and forcing the music industry to change its business models to embrace digital downloading.

Advantages
Today’s MP3-type headphone stereos store compressed music in flash memory or on tiny hard-disk drives (HDDs), and they’ve proven popular for many reasons. They’ve freed up music previously locked to a PC’s HDD; they’re a lot smaller than headphone CD players; and they store a lot more music than a CD. With storage capacities as large as 60 GB, HDD models are essentially mini jukeboxes capable of storing some consumers’ entire CD music collections -- or thousands of songs.

Flash-memory portables are smaller and lighter than HDD models but have lower storage capacities ranging from 128 MB to 6 GB. Because they lack moving parts, they don't skip even under the most extreme circumstances, and their batteries last longer than the batteries of HDD portables and most headphone CDs – as much as 60 hours in select 2006 models such as the latest devices from LG. The rechargeable batteries of HDD portables, which are also highly resistant to skipping, last up to 20 hours in models announced early in 2006.

Quick Changes
Although relatively young, the market for compressed-music portables has evolved quickly. Dozens of companies, from major consumer electronics and PC brands to obscure names, have entered the market in recent years, and in 2006, more companies are following. Recent newcomers include makers of embedded and removable flash memory, at least one digital-camera supplier, and assorted consumer electronics and computer-peripheral companies.

The popularity of MP3 also has spawned such rival formats as Advanced Audio Coding (AAC), Windows Media Audio (WMA), ATRAC3plus and Ogg Vorbis.

Compressed-music technology has appeared in a wide range of products. It’s common, for example, to find home DVD players, car CD players, CD boomboxes and headphone CD players that play CDs encoded with compressed music.

Unexpected Places
Compressed-music playback is turning up in some unexpected quarters. For example:

-The number of MP3-playing cellular phones proliferated in 2005 and 2006, allowing consumers to carry one device instead of two. Some of the phones download compressed music over the cellular airwaves.

-In 2004, the first MP3-playing sunglasses debuted, and sunglasses from at least three companies will be available in 2006.

-The first boomboxes equipped with flash memory are expected to appear in 2006 to store and play compressed-music files.

-In 2005, consumers could buy the first headphone MP3 player that stores music transferred from a PC and music time-shifted from a docked home satellite tuner.

-And in 2006, consumers can buy the first MP3 headphone stereos with integrated satellite-radio tuners. The devices receive live satellite-radio programs, store satellite-delivered songs in memory for later playback, and store music files transferred from a PC.

In another evolutionary step, the first Wi-Fi-equipped MP3 players are expected to appear in 2006. They download music from the Web by tapping directly into a wireless network at home, at work or in a wireless “hot spot” in such places as coffee shops and airports. The devices are intended for time-starved people who have little spare time to rip CDs or engage in the often-complicated process of downloading songs and transferring them to a portable. No matter where they are, consumers can select songs from the devices’ internal database of titles. The player then automatically will download the selected songs when it moves in range of a wireless network – and potentially get a database update.

 Surging demand for handheld music jukeboxes has driven many suppliers to extend the jukebox concept to video. Many HDD music portables, and a handful of flash-memory models, have evolved into portable media players (PMPs) with color LCD screens that display digital photos and video transferred from a PC, TV or digital video recorder (DVR).

Compressed Music, Expanded Appeal
CEA statistics underscore the appeal of compressed music. Factory-level sales of compressed-music (MP3-type) headphone portables almost tripled in 2005, growing 228 percent to $4.23 billion compared to a mere $80 million in 2000.

Headphone MP3 players have grown so popular that in 2005, they accounted for the majority of portable audio dollar sales, or 85 percent of portable audio’s $5 billion factory-level volume, CEA statistics show. In 2006, MP3’s share is projected to grow even more.

Sales of compressed-music portables have reinvigorated the portable audio market, which suffered two consecutive years of dollar-sales declines in 2001 and 2002, but in 2005 posted their third consecutive year of growth. MP3-type portables were solely responsible for the surge, CEA statistics show.

In 2005, factory-level portable audio sales reached an all-time record $5 billion, rising 119 percent to easily exceed the previous record of $2.8 billion set in 1994, according to CEA statistics.

In another measure of compressed-music's popularity, CEA found that a growing number of headphone CD players play WMA- and MP3-encoded CDs, enabling them to store hundreds of songs in near-CD quality on recordable 65-MB and 700-MB CDs. In 2005, about 39 percent of headphone CD players sold at the factory level were capable of playing MP3-encoded CDs, up from only nine percent in 2002, CEA said.

Music Companies up on Downloads
Perhaps the most telling indicator of compressed-music demand is the music companies’ embrace of music downloads over the Internet. By early 2006, more than two million songs were available for authorized downloading from 20 sites, with more to come. That’s according to the International Federation of the Phonographic Industry, which represents 1,450 recording-industry companies in 75 countries. From the authorized download sites, consumers can download copy-protected music files legally for transfer to compatible headphone portables.

Unable to stem the Internet-downloading phenomenon, major music companies have embraced the compressed-music phenomenon — although they initially did so slowly and reluctantly. It wasn’t until 2000 that major music companies authorized the downloading of a limited amount of music from select websites. The companies’ intent was to give download enthusiasts a “legal” alternative to Internet file-sharing services, which they contended distribute songs in violation of copyright laws and played a major role in declining music-industry sales.

By late 2002, the music companies’ authorized-download efforts hadn’t achieved mainstream success because the number of downloadable songs was limited to 300,000. Only select songs could be burned to CD, and even fewer songs could be transferred to compressed-music portables.

Liberal Media
That began to change in the latter part of 2003 with the launch of multiple sites authorized to offer downloads with more liberal personal-use rights. These sites offer a la carte downloads at 99 cents per song or less, downloads of full albums, burning of all songs to CDs, transfers of all songs to compatible portables, and the ability to play the songs from two to three PCs registered with the site. The songs can be transferred to the different PCs via a home network, e-mail or burned disc, depending on the site’s rules.

To protect their revenue streams, music companies did insist on additional copy-control measures. For example, once a song is transferred to a portable, the song can’t be transferred from the portable to another PC.

By the end of 2005, more than two million songs and 165,000 albums were available for legal downloading, according to IFPI. From that music selection, consumers worldwide downloaded 420 million individual tracks in 2005, more than double the previous year.

In the U.S., the statistics were equally impressive:

-The number of single-track downloads doubled in 2005, hitting 353 million tracks, with a weekly average of seven million, according to Nielsen Soundscan.. By 2009, Price Waterhouse Coopers projects 1.2 billion annual downloads.

-The number of full-album downloads rose 193 percent to 16 million, representing 2.6 percent of total albums sold, up from one percent in 2005, IFPI said. By 2009, the number of full-album downloads will hit 80 million, Price Waterhouse Coopers projects.

In charting the uptick in downloads, the IFPI also said the number of legal music sites around the world grew to more than 335 in 2005, up from 50 only two years ago, and that 20 operated in the U.S., where additional sites are expected to go online in 2006.

All told, music companies’ download revenues tripled worldwide in 2005 to about $1.1 billion, IFPI said. That figure includes cellular-phone downloads of music ringtones, which accounted for about 40 percent of that dollar volume. Downloads and ringtones accounted for about six percent of the music industry’s global revenues.

  Within Western Europe and North America, Strategy Analytics estimates that downloads to PCs, combined with over-the-air downloads of ringtones and full songs to cellular phones, accounted for 13.9 percent of total consumer spending on music in 2005. By 2010, the market-research company expects more than $8.2 billion worth of music to be downloaded in those regions, accounting for almost 30 percent of total music sales.

Portable-friendly Subscriptions
Although paid-for downloads have proven popular, another download option – subscription-based downloads – has attracted a significant following since the first such service launched in 2004. Since then, most authorized download sites have begun to offer subscription options, which let consumers download as many songs as they want from a service’s entire catalog as long as a monthly subscription of $9.99 to $14.99/month is paid. The songs can be played from the PC’s HDD, but in a major change from previous subscription download services, the songs now can be transferred to compliant MP3-type portables. PC-stored songs “time out” if the subscription lapses. Songs transferred to the portables time out unless the portables are periodically connected to the PC to reauthorize playback.

With subscription-download services, consumers can store thousands of downloaded songs on their PC or portable player without paying thousands of dollars for them.

The idea is catching on. In 2005, the number of subscription-download users grew to 2.8 million from 2004’s 1.5 million, IFPI said. The vast majority are in the U.S. By 2010, subscription revenues in the U.S. alone will hit $1.2 billion, increasing at a compound annual growth rate of 37 percent from 2005, according to Jupiter Research.

Illegal Downloading Still Rampant
Although the explosion of authorized downloadable songs and albums has encouraged many people to download files legally, unauthorized downloading through peer-to-peer (P2P) file-sharing networks continues to run rampant. P2P networks enable computers around the world to share files from their HDDs, including music ripped from CDs or downloaded from another P2P-network computer.

The number of infringing files available at any one time, however, has trended down. At the end of 2005, an estimated 885 million music files were available for illegal sharing over the Internet, down 20 percent from their 1.1 billion peak in April 2003, IFPI said.

Despite the decrease in files available for sharing, the percentage of households downloading unauthorized music files through a P2P network rose for the 12 months ending June 2005, according to The NPD Group. In June 2005, 9.7 percent of U.S. internet-connected households downloaded from a P2P network, up from 8.7 percent during the year-ago period. Meantime, the number of Internet households that downloaded from an authorized service grew to 2.8 percent in June 2005 from 1.4 percent in June 2004, NPD said.

Long term, NPD said it expects unauthorized file sharing to decline as “the environment for pirating gets more challenging.” The challenging environment includes music-industry lawsuits against users and P2P network operators.

Copyright Enforcement
In recent years, the music industry has sued thousands of individuals who are frequent file-sharing users. The RIAA has initiated campaigns to educate consumers, universities and corporations about the illegality of unauthorized file sharing.

In a crucial advance for the music industry, the U.S. Supreme Court in 2005 unanimously ruled that companies operating unauthorized P2P services can be sued and shut down if they intentionally induce users to violate copyrights. The decision led P2P company Grokster to shut down as part of an out-of-court settlement with the music industry, although the shutdown can’t stop current users of Grokster software from sharing files until caught and prosecuted.

The Supreme Court decision upheld the court’s 1984 Betamax decision. In that decision, the court ruled 5-4 that, even if some consumers use VCRs to violate copyright laws, VCR makers couldn’t be held liable for “contributory” infringement because their products offer “substantial non-infringing uses.”

Grokster Decision Unclear
The court, however, didn’t use the Grokster case to clarify the meaning of “substantial non-infringing uses,” and in the digital era, CEA fears the court’s lack of direction will cause technology developers to think twice about pursuing innovative technologies for fear of lawsuits by deep-pocket movie and music companies.

In another bid to offer alternatives to illegal P2P sharing, the music industry encouraged the 2005 launch of the first authorized P2P file-sharing network in beta form. Users have access to more than two million songs from all four major music companies and many independents, but only if a fee is paid to copyright holders. The technology identifies songs by their digital fingerprints, identifies the copyright holders, and seeks payment from downloaders. In effect, the technology turns consumers into authorized resellers and potentially boosts music company profits by eliminating the retail middle man. Initially, however, the first downloads come directly from the service’s own server to “seed” the Internet with authorized files.

Copy-protected CDs
Also to control rampant illicit copying, some major music companies have adopted various technologies to control CD copying on PCs. One technology, called MediaMax, prevents PC playback of a music CD's standard uncompressed tracks but allows playback of duplicate tracks encoded in the compressed Windows Media Audio (WMA) format. Through digital rights management (DRM) technology, copyright holders give consumers the option of transferring the WMA files to a PC’s hard drive, transferring them to an MP3-type portable, or burning them to a CD (or none of the above). Optional rules also could prevent emailing music files and sharing them through file-sharing services.

Often, the rules on a particular disc allow the disc’s protected WMA files to be transferred to a PC’s HDD, permit the burning of the WMA tracks to CDs up to three times, transferring the WMA tracks on a protected basis to compatible compressed-music players, and sharing songs by e-mailing links to copy-protected files that expire after a certain number of days.

In 2005, one major music company sold millions of CDs protected with a form of copy protection called Extended Copy Protection (XCP), which installed a hidden program on PCs to prevent copying of XCP-protected discs. They also left the PCs vulnerable to viruses, and they reported personal information from consumers' computers to the music company.

Following class-action suits, government criticism and consumer outrage, the music company recalled unsold CDs from all stores, offered to exchange purchased CDs for versions lacking the software, and offered software to purge the rootkit from PCs.

Hard Disk Advantages
Whether they get their music by ripping CDs or by downloading, consumers overwhelmingly have voted in favor of headphone MP3 players that store music on tiny HDDs with capacities as big as 60 GB. That compares to a maximum of six GB of embedded memory in flash-memory models announced in early 2006.

 The first headphone stereos equipped with tiny HDDs appeared in 2000, and by 2004, their factory-level unit sales exceeded unit sales of flash-memory models, CEA statistics show. For the first nine months of 2005, NPD found, HDD models accounted for 58.5 percent of MP3 portables sold at retail, up slightly from 55.6 percent.

At the same time, however, the unit and dollar growth rates of flash-memory models outpaced HDD models’ growth rate, growing 253 percent and 221 percent, respectively, in units during the nine-month period, NPD found. Marketers cite the growing capacity of flash-memory models, which in their first generation stored a maximum of 64 MB of music.

Flash Dancing
Flash models are dancing off the shelves because of shrinking sizes, shrinking prices and growing memory capacities that exceed the capacities of some early HDD models. In 2006, consumers are getting better values than ever before. Select flash-memory models will offer four GB at less than $249 and six GB at less than $300, enough to store thousands of songs in near CD quality. Compare those prices to what was available in 2000, when the typical removable 64-MB memory card (excluding player) sold for $149 and stored only 20 to 40 songs in near-CD quality.

At least one 2006 model will come with a memory-card slot that accepts memory cards as big as eight GB.

Lower prices and higher capacity only have enhanced the traditional advantages of flash-memory models, whose lack of moving parts yields smaller size, lighter weight, skip-free playback for joggers and hikers, and more often than not, longer battery life.

On select 2006 models, battery lives are expected to range up to 18 to 28 hours of music playback, and at least one model (LG), featuring one GB capacity, will offer 60 hours on its internal rechargeable battery in a package that’s only 2.4x1.6x0.55 inches in size and 1.8 ounces in weight. It’s small enough to hang on a keychain.

HDD models, in contrast, were expected to offer anywhere up to 20 hours for music playback in packages as small as 2.2x3.4x0.67 inches.

For active users, skip-free playback is another key advantage of flash-memory models. HDD models use moving mechanical parts to read music files, so they’re not completely immune to skipping. Nonetheless, suppliers minimize the skip potential by playing back music through high-capacity solid-state memory buffers that are refilled periodically from the disk drive. Some suppliers also ruggedize their HDD models to guard against disk-drive crashes when the devices are used during vigorous activities, including workouts at the gym.

Even as flash-memory prices fall, suppliers are packing more features into flash-memory portables, including FM tuners, digital voice recorders and MP3 encoders. MP3 encoders enable PC-phobic consumers to transfer songs directly from a connected CD player, avoiding the use
of a PC.

In recent years, suppliers have introduced flash-memory models that incorporate digital cameras, and many display digital photos transferred from a PC. A small but growing number in 2006 also will display full-motion color video transferred from a PC for on-the-go viewing. A growing number of authorized video download sites are launching in 2006 to give consumers more video content to transfer to the portables besides home movies and copyrighted programs available illegally on P2P networks.

Several flash-memory models available in 2006 also give consumers the option to record TV programs directly from a TV or digital video recorder (DVR). Some of the portables display the stored images and videos on connected TVs for easy group viewing.

Eventually, however, many suppliers expect consumers to opt for small-size, high-capacity, flash models for music and gravitate toward high-capacity HDD models for their on-the-go A/V use.

HDD Players Add Functionality
Although they’re a bit larger and pricier, HDD models are expected in 2006 to outsell flash-memory models for the third consecutive year. Not only do HDD models offer higher storage capacity, but because of their size, they’re more likely than flash-memory models to make room for FM radios, recording of FM-radio programs, built-in MP3 encoders and built-in FM transmitters that transmit music to nearby home or car radios for playback.

Select models also are turning up with built-in Global Positioning System (GPS) satellite navigation. These models, the first of which appeared in 2004, play music but also display maps, pinpoint your location on the map and deliver turn-by-turn driving (or walking) instructions to a destination.

Because their storage capacities are generally larger, HDD models are also more likely than flash-memory models to include photo viewers and color displays to store and display digital pictures snapped by digital-camera owners, or in a couple of cases, from built-in digital cameras.

Video Features
With storage capacities as large as 60 GB, a growing selection of HDD music portables have turned into portable media players (PMPs), which display digital photos and moving pictures transferred from a PC or recorded directly from a TV or DVR. The first PMP appeared in 2002, and in 2006, about a dozen suppliers were expected to ship models starting at about $299.

In 2006, at least a half dozen suppliers are launching the first HDD-equipped PMPs with built-in GPS navigation.

Although PMP demand has been low to date, sales could expand dramatically as more devices become available with the ability to record TV programs directly from a TV, record home movies from the analog outputs of VCRs and DVD players, and (although currently rare because of copyright concerns), record theatrical movies from DVD players’ analog outputs. Some models operate like time-shifting VCRs, thanks to built-in timers that record live programs from a connected TV in your absence.

Another factor that will encourage PMP sales is the launch of models that record directly from the USB 2.0 digital outputs of select DVRs, enabling high-speed transfers at 10x to 12x speeds from the DVR to the PMP. A handful of models appeared for the first time in 2005 and were compatible with EchoStar’s DVR/satellite-TV tuners. Prices in early 2006 started at around $329. In 2006, PMPs due from at least one supplier will connect via USB to select DirecTV DVR/satellite-TV tuners.

Such devices will expand the amount of video content available to take on the road dramatically, as will this year’s launch of additional movie-download services offering hit movies transferable to select PMPs.

MP3, Cellular Convergence
The popularity of portable digital devices – from MP3 players to cellphones and handheld navigation devices – has led consumers to stuff their pockets with multiple devices. To eliminate overstuffed pockets, cellular phone suppliers have expanded their selection of music-playing cellphones, which store compressed music in flash memory for playback through stereo headsets that double as hands-free cellular headsets. Some phones also use wireless Bluetooth technology to deliver the music wirelessly to headsets, eliminating tangled wires.

To accommodate bulging music libraries, many of the MP3 phones accept removable memory cards to expand music-storage capacity to 2 GB. Many also feature music-oriented user interfaces and dedicated music-playback keys.

For the first time in 2005, Americans were able to download songs over the cellular airwaves directly to their phones for storage and playback. The service was launched by one cellular carrier in 2005, and two others followed in early 2006. When a subscriber downloads a song to a phone, a copy of the song is made available for downloading to the user’s PC for PC playback, disc burning and transfer to other portable devices. The downloads are quick because carriers are using broadband-speed packet-data technology to deliver the music.

Converged music/cellular devices seem to make so much sense that in 2004, Strategy Analytics estimated that worldwide unit sales of MP3-capable cellphones exceeded shipments of dedicated MP3 portables for the first time. By 2010, MP3 cellphone sales will exceed dedicated music portable sales by four times, the company said.

Strategy Analytics cautions that not all MP3 cellphone owners will listen to music on their phones, but the urge to do so will grow as the quality gap narrows between dedicated music players and MP3 cellphones. “The sound quality of mobile music devices is improving significantly year on year, and the amount of memory both embedded and available via removable slots is growing exponentially,” the research company said. “The writing is on the wall for dedicated music players, at least when it comes to the casual music consumer,” which the company estimates to be 80 percent of the market. These consumers “will likely be easily seduced by the convenience of a single pervasive device, while the hard core music fans will likely not sacrifice their dedicated device.”

Bridges to Home, Car Audio Systems
Home and car audio systems are leveraging the popularity of compressed music, not only by playing back CDs encoded in compressed-music formats, but also by connecting to compressed-music portables to control them and amplify their music through big speakers. In some cases, select compact stereo systems and home-theater-in-a-box (HTiB) systems rip CDs and transfer the CDs’ music to connected headphone MP3 portables.

In 2005, the first two compact home stereo systems appeared with the ability to rip CDs and transfer the songs to headphone MP3 portables. In 2006, that number will grow to at least six systems, most of which will be bundled with headphone MP3 players. Also in 2006, at least one supplier plans a HTiB system that rips CDs and transfers the songs to connected MP3 portables. That supplier will bundle an MP3 portable with the system.

Consumers in 2006 also will choose from a greater selection of HTiBs that control connected MP3 portables – at least connected flash-memory portables – and play back their music through the system’s speakers. These systems’ remotes will control song selection through a user interface appearing on the system’s front-panel display or on a connected TV screen. Only one supplier offered such systems in 2005, but at least three more suppliers will do so during 2006. Most of the systems will play back audio and video files stored on USB flash drives and MP3 flash-memory players, and some will also control portable HDD music and media players.

MP3-controlling compact stereo systems from at least two companies are available in 2006 at prices as high as $1,599. These systems aren’t to be confused with dedicated MP3-player docking stations that incorporate amplifiers and speakers but no CD player or AM/FM receiver. Multiple companies have begun offering these devices in the past few years ranging from $99 to about $349.

Component A/V receivers also made the MP3 connection in a big way in 2005, when most A/V receiver suppliers began offering models that dock with MP3 portables (usually iPod-branded portables because of their market dominance). The receivers control song selection and reproduce the connected portable’s music through high-power amplifiers.

Suppliers of custom-installed distributed-audio systems are making the music-player connection. About a half-dozen suppliers in 2005 began offering the industry’s first docking stations that connect portable players to custom systems, which distribute the players’ music throughout the house via in-wall and in-ceiling speakers. In 2006, more suppliers will join them.

A growing selection of aftermarket car stereos and automakers’ original-equipment sound systems also provide high-quality wired connections to MP3 portables. They play back the portables’ content and select songs from a menu appearing on a larger, easier-to-view display.

MP3-CD Portables
Demand is growing for headphone CD players that play CDs encoded in one or more compressed-music formats, thanks to the 650-MB and 700-MB storage capacities of recordable data CDs. The 700-MB discs store up to about 700 minutes of near-CD-quality, 128-kbps MP3 music (and almost twice as much near-CD-quality, WMA-encoded music).

In 2000, suppliers launched the first MP3-CD headphone stereos, and in 2006, models that play MP3-CDs are running as low as $29 or less. At that price, they’re a very affordable alternative to flash-memory and HDD music portables.

In spring 2004, consumers got another disc-based format to consider: Hi-MD. To date, however, it is offered by only one major supplier. The 2.5-inch, one-GB discs store as much as 45 hours of near-CD-quality music encoded at a 48-kbps data rate in the ATRAC3plus compressed-music format. They’re playable in PC-connectable headphone portables priced from $199 but are available in the U.S. from only one supplier.