Compressed Music, Expanded Appeal:

CEA statistics underscore the appeal of compressed-music for-mats. In 2004, factory-level sales of flash-memory and HDD headphone portables rose 204 percent to an all-time high of $1.29 billion, according to CEA statistics.

Sales of compressed-music portables have reinvigorated the portable audio market, which suffered two consecutive years of dollar-sales declines in 2001 and 2002, CEA statistics show. In 2003 and 2004, MP3-type portables were solely responsible for the surge in portable-audio sales, which consist of MP3-type headphone stereos, CD- and cassette-based headphone stereos and boomboxes. Combined portable-audio sales rose at the factory level by 2.8 percent in 2003 and by 27.4 percent in 2004 to a $2.18 billion, CEA statistics show.

Compressed-music portables are popular because they give computer-literate music enthusiasts the ability to listen to compressed-music files away from their PCs. The tradeoff: the sound quality of compressed music approaches – but doesn’t match – CD sound quality (at least not yet).

The portable devices also have other advantages. Flash-memory portables are smaller and lighter than headphone CD players. Because they lack moving parts, they don't skip even under the most extreme circumstances, and their batteries last longer than the batteries of most headphone CDs. HDD portables are similarly compact, and they’re highly resistant to skipping. With storage capacities from 1.5 GB to 60 GB, they're essentially mini jukeboxes capable of storing some consumers’ entire CD music collections – or thousands of songs – in near-CD quality.

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. In 2004, about 39 percent of headphone CD players sold at the factory level, or about 5.2 million, were capable of playing MP3-encoded CDs, up from only 9 percent in 2002, CEA said. 

 

Music Companies up on Downloads:

Unable to stem the Internet-downloading phenomenon, major music companies have embraced the compressed-music phenomenon although slowly and reluctantly. In 2000, major music companies for the first time authorized the downloading of a limited amount of music from select authorized 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 CD sales. In 2003, unit and dollar sales of CDs fell for the third consecutive year, according to the Recording Industry Association of America (www.riaa.com). Units were off 7.1 percent in 2003, and dollars were down 6.7 percent. Sales in 2004, however, were tracking upward.

By late 2002, the music companies’ authorized-download efforts hadn’t achieved mainstream success, in part because the sites rendered PC-stored songs unplayable if you stopped paying a monthly subscription fee. On top of that, for an additional fee, most sites let consumer’s burn only select songs to a recordable data CD. Even fewer songs could be transferred to compressed-music portables, and only a handful of portables at that. The downloadable-song selection also was limited to less than 300,000 – a fraction of the music companies’ catalogs. 

 

Liberal Media:

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

To protect their revenue streams, music companies did insist on some 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 2004, about 1 million songs were available for legal downloading, according to the International Federation of the Phonographic Industry (www.IFPI.org). The organization represents 1,450 recording-industry companies in 75 countries. From that selection, U.S. consumers downloaded 140 million tracks, up from the previous year’s 20 million, according to Neilsen Soundscan (www.soundscan.com). Market research company Jupiter estimates that U.S. consumers paid $330 million in 2004 to download music legally and will double their purchases in 2005.

Download growth “helped bring record companies their first year of significant revenues from digital sales, running into several hundred million dollars,” the IFPI said. In five years, some analysts and music companies expect downloads to account for 25 percent of industry revenues compared to a current 1 to 2%.

In charting the uptick in download, the IFPI also said the number of legal music sites in the U.S. and Europe quadrupled in 2004 to more than 230, up from the year-ago 50. More than 150 of them are in European countries. 

 

Portable-Friendly Subscriptions:

Despite the success of a la carte downloading, subscription-based downloading isn’t dead. The concept was revived in late 2004 by the authorized Napster music service with new elements said to eliminate consumers’ objections to previous subscription-based download services. Other download services are likely to follow.

Napster’s Napster To Go service lets consumers download any song from the service’s entire catalog as long as a monthly $14.95 subscription is paid up. The songs can be played from the PC’s HDD, and in a major change, they can now be transferred to compliant portables. PC-stored songs “time out” if the subscription lapses. Songs on the portables time out unless the portables are periodically connected to the PC.

With such a service, consumers can listen to tens of thousands of downloaded songs on the go without paying up to a buck apiece for them. 

 

Copyright Enforcement:

Having fed consumers the download carrot, the music industry also is swinging a big stick. The industry successfully sued to shut down one file-sharing service and is suing another. The RIAA has initiated campaigns to educate consumers, universities and corporations about the illegality of unauthorized file sharing. The industry also has sued individuals found to be among the most frequent users of unauthorized file-sharing services.

Music companies also are investigating new technologies that would allow peer-to-peer file sharing of copyrighted music, but only if a fee is paid to copyright holders. If installed in peer-to-peer networks, the technology would identify songs by their digital fingerprints, identify the copyright holders and seek payment from downloaders. In effect, these technologies would turn peer-to-peer networks into online music stores, convert peer-to-peer users from freeloaders into authorized downloaders and potentially boost music company profits by eliminating the retail middle man. Almost any copyrighted song in any person’s possession, no matter how obscure, could potentially become available to consumers for downloading through authorized sources.

The music industry also is experimenting with various technologies that restrict CD copying on PCs without restricting playback on PCs. One technology 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.

Music companies also are looking at technologies that plug the so-called “analog hole.” Today, consumers can use their PC’s analog-audio outputs to circumvent digital copy-protection technologies. Once music passes through the analog outputs, it can be reconverted to digital by another PC, by a home audio CD recorder, or by an MP3 encoder. One technology under consideration would make such copies unlistenable. It embeds a hidden signal directly in the music of an audio master. From the master, the signal is transferred to commercial CDs. When a protected CD is copied through a PC’s analog outputs, the hidden signal becomes annoyingly audible on the digital copy – even on analog cassette tapes. 

 

MP3 Growth Trends:

In 2005, robust growth continues to entice more companies into the already crowded market for MP3-type headphone stereos. The companies include makers of flash-memory cards, at least one digital-camera supplier and assorted consumer electronics and computer-peripheral companies. Strong growth also is prompting many companies to expand their selections and other companies to segment the market with their first ruggedized sports-style models for active users.

In 2004, suppliers also rapidly expanded the selection of high-capacity HDD portables, whose factory-level unit sales in 2004 exceeded unit sales of lower priced flash-memory portables for the first time, suppliers say. With capacities from 1.5 GB to 60 GB, HDD portables can store thousands of songs, the equivalent of some consumers’ entire CD music collections and sort through a consumer’s music collection by title, artist or genre.

Consumers instantly understand the appeal off HDD-equipped portables, so much so that in 2004, 67 percent of all compressed-music players sold by suppliers were HDD-based models, CEA statistics show. Because of their higher prices, HDD models accounted for 83 percent of compressed-music dollar volume of $1.29 billion.

Point-of-sale data collected by NPD Group points to a similar mix. For the 12 months ending November 2004, HDD models accounted for 57 percent of unit MP3-portable sales and 73 percent of dollar sales at the retail level, NPD said. That compares to 30 percent of unit sales and 50 percent of dollar sales for the year-ago period.

 

Hard Drive Advantages:

The first headphone stereos equipped with tiny HDDs appeared in 2000. Now they’re available from most suppliers of MP3 portables at increasingly affordable prices. For the 12 months ending November 2004, for example, the average retail price of 20 GB models fell to about $322 from November 2003’s approximate $343, NPD found.

With these devices, consumers can store thousands of songs for playback, in some cases storing their entire CD music collections on one handheld device. A 6-GB model, for example, stores almost 100x more music than 64 MB of flash memory.

Big capacities, however, don’t necessarily call for big packages. Models with 2.5-inch HDDs are giving way to a growing number of models with 1-inch and 1.8-inch HDDs.

Unlike flash-memory portables, HDD models use moving mechanical parts to read music files, so they’re not 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. Other suppliers, however, contend a lightweight flash-memory portable with no moving parts is best for the most-active users.

Consumers see many advantages to HDD models, and the number of advantages is growing as suppliers pile on such features as FM radios, recording of FM-radio programs and built-in MP3 encoders. With built-in encoders, unavailable in most flash-memory portables, consumers can rip songs directly from a home or portable CD player without using a crash-prone PC.

Some HDD models also include photo viewers and color displays to store and display digital pictures snapped by digital-camera owners. At least one model in 2005 will feature built-in megapixel digital-still camera. A handful of models include FM transmitters so that consumers can play their music through a nearby home or car radio. 

 

Home, Car Bridges:

In 2005, consumers also will find the first HTiB (home-theater-in-a-box) systems that connect directly via a cable to a HDD portable to play back the portable’s music through the system’s speakers. These systems also control song selection through a user interface appearing on a TV screen.

Suppliers of distributed-audio systems also are making the music-player connection. At least two suppliers planned in 2005 to offer docking stations that connect portable players to custom-installed distributed-audio systems, which distribute the players’ music throughout the house via in-wall and in-ceiling speakers.

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

 

Portable A/V Players:

With their gigabyte storage capacities, more HDD portables in 2005 are turning into so-called portable media players (PMPs), which display still and moving pictures transferred from a PC. Some will record TV programs directly from a TV, and others incorporate a built-in digital camera and camcorder. Some of these devices also display stored images and video on connected TVs for easy viewing by friends and family.

The first PMP appeared in 2002, and in 2005, about a dozen suppliers were expected to ship models starting at about $400.

In a 2004 report, market research company In-Stat/MDR projected that worldwide PMP sales would experience 700 percent growth in 2004 to 390,000 units and an overall compound average growth rate of 179 percent through 2008 to 7.65 million. That’s despite an average selling price that “is not expected to decrease very quickly over the forecasted period,” the company said.

North American shipments in 2003 hit 41,000, rising a projected 51 percent in 2004 to 199,000, In-Stat said. In 2008, it projects North American shipments of 2.83 million.

One supplier estimates North American shipments of only around 75,000 to 100,000. Whatever the actual number, sales could expand dramatically as more devices become available with the ability to record video directly from a TV and, in some cases, from the analog outputs of VCRs and DVD players. Such devices dramatically would expand the amount of video content available to take on the road, some suppliers contend.

Regardless of the video content source, suppliers are targeting three types of users: commuters, travelers and people wanting to entertain their children. 

Flash ­Memory Portables:

Prices are falling. Capacities are rising. Suppliers are packing in more features. And consumers are getting better values than ever.

In 2004, suppliers planned to expand the selection of flash memory models with capacities of 256 MB and 512 MB, far exceeding the 32 MB and 64 MB capacities of first-generation models available during the industry’s early years. With 256 MB memory, portables store about 256 minutes of MP3 music encoded at a 128 kbps data rate, which delivers near-CD quality. A capacity of 256 MB is enough to store about 512 minutes of WMA-format music at 64 kbps, which also delivers near-CD quality. To further expand capacity, consumers can plug in optional memory cards in some models to expand memory up to 1 GB or more.

Today, the price of memory is cheaper than ever. For the 12 months ending November 2004, the average 512 MB flash-memory portable sold for about $190, down from about $270 during the year-ago period, NPD Group statistics show. In 2005, new 512 MB models were targeted to retail for as little as $179 and some of the first 1 GB models were to be available as low as $179. Compare those prices to what was available in 2000, when the typical removable 64 MB memory card (excluding player) sold for $149.

Even as 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. At least two models in 2005 include built-in digital-still camera and ability to capture full-motion video like a camcorder, enabling consumers to capture unplanned spur-of-the-moment events. These devices also display full-motion color video transferred from a PC. One of them also records TV programs directly off a TV for on-the-go viewing.

More flash-memory models also feature “future-proof” programmable processors, enabling consumers to upgrade their models to support additional compressed audio formats. These flexible products help assuage consumers uncomfortable with the lack of standardization and potential for obsolescence.

MP3­CD Portables:
In 2004, suppliers planned to expand the selection of flash-memory models with capacities of 256 MB and 512 MB, far exceeding the 32 MB and 64 MB capacities of first-generation models available during the industry’s early years. With 256 MB memory, portables store about 256 minutes of MP3 music encoded at a 128 kbps data rate, which delivers near-CD quality. A capacity of 256 MB is enough to store about 512 minutes of WMA-format music at 64 kbps, which also delivers near-CD-quality. To further expand capacity, consumers can plug in optional memory cards in some models to expand memory up to 1 GB or more.

Today, the price of memory is cheaper than ever. For the 12 months ending November 2004, the average 512 MB flash-memory portable sold for about $190, down from about $270 during the year-ago period, NPD Group statistics show. In 2005, new 512 MB models were targeted to retail for as little as $179 and some of the first 1 GB models were to be available as low as $179. Compare those prices to what was available in 2000, when the typical removable 64 MB memory card (excluding player) sold for $149.

Even as 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.

 

Source: CEA Market Research, 1/05

At least two models in 2005 include built-in digital-still camera and ability to capture full-motion video like a camcorder, enabling consumers to capture unplanned spur-of-the-moment events. These devices also display full-motion color video transferred from a PC. One of them also records TV programs directly off a TV for on-the-go viewing.

More flash-memory models also feature “future-proof” pro-Demand also is growing for headphone CD players that play MP3-encoded CDs, 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).

 

*Includes flash media and hard­drive based portable MP3 players. Source: CEA Market Research, 1/05

More important, the cost of recordable data CDs is minimal compared to the price of solid-state memory. By early 2005, write-once data CD-Rs were available in bulk for as little as 20 cents per disc when purchased in “spindles” of 50 each during special promotions.

In 2000, suppliers launched the first MP3-CD headphone stereos, and in 2005, the selection of models that play MP3- and WMA-encoded discs has grown. Prices from well-known brands fell to as little as $49 by early 2005, and lesser known brands were available for as little as $29. 

 

Hi­MD Format:

The CD isn’t the only disc-based medium that stores compressed-music files for on-the-go listening. Some consumers use 1.44 MB MiniDiscs, the 2.5-inch cartridge-clad rewritable discs, to store compressed music for playback on headphone stereos that are much smaller than their headphone-CD counterparts.

In spring 2004, consumers got another disc-based format to consider: Hi-MD. The 2.5inch, 1 GB discs are playable in PC-connectable headphone portables priced from $199. These portables are promoted as removable-media competitors to 1.5 GB HDD portables. Hi-MD portables combine the capacity and recording flexibility of HDD models with the advantages of disc-based portables, proponents contend.

The advantages of disc-based portables over HDD portables include lower power consumption and removable media that can be swapped among friends. First-generation Hi-MD portables, for example, operated for more than 30 hours on a single AA battery, while most HDD portables stopped spinning after about 10 hours of use. Some HDD portables, however, spin for up to 20 hours.

Hi-MD discs store up to 45 hours of near-CD-quality music encoded at a 48 kbps data rate in the ATRAC3plus compressed-music format. That compares to MiniDiscs that store up to 5.5 hours of ATRAC3-encoded music at a 66 kbps data rate. In early 2005, MiniDiscs cost as little as $1 each when purchased in packs of 10. Hi-MD discs cost an everyday $7 at that time.