BUSINESSWEEK ONLINE : AUGUST 9, 1999 ISSUE
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INTERNATIONAL -- EUROPEAN BUSINESS

A Microchip in Your Ear (int'l edition)
The Danes' lead in miniature audio spawns a slew of fresh applications

It was an audacious gamble for a small Danish company, a risk more typical of Silicon Valley than Scandinavia. Betting on ever smaller and more powerful microprocessors, Widex, a hearing-aid maker outside Copenhagen, bet millions on an unproven idea: computerized hearing aids small enough to fit into the ear. As things turned out, Widex was part of a new mini-industry. A week before it unveiled its long-awaited product three years ago, a crosstown competitor called Oticon Inc. released its version of the digital hearing aid. Since then, GN Danavox, yet a third Danish hearing-aid company, has come up with twin computers that snuggle in the ears, each with an operating system and 14 tracks of sound. ''For the hearing impaired,'' says GN Danavox CEO Jesper Mailind, ''this is like moving from mono to hi-fi.''

Denmark's leadership in the hearing-aid market--worth $1.5 billion worldwide--has long been one of Europe's small curiosities. Now, as the industry goes digital, the Danes are suddenly at the heart of a vital computer technology: miniature audio. These lima-bean-size systems function for a week on tiny one-volt batteries. While the technology was developed to help people hear, its potential applications are much broader. Miniature audio could bring CD-quality stereo to the next generation of cellular phones. In time, it could even provide audio links to the Web.

Denmark's success in developing these systems is a textbook example of how world-beating technology can take root in small corners. Finnish innovator Nokia made much the same point with its mastery of cellular telephones. Together, the three Danish companies developing miniature audio fall short of $800 million in annual sales. But foreigners from Switzerland's Phonak to Germany's Siemens--the leader in traditional analog aids--are racing to catch up. Starkey Labs Inc. of Minneapolis will release a digital aid within days. In response, GN Danavox has just bolstered its U.S. presence with the purchase of ReSound Corp., a hearing-aid maker in Redwood City, Calif., for $180 million.

WAKEUP CALL. Digital sound, the basis for CD players, is a natural for hearing aids. Once sound is reduced to numbers, researchers and engineers can repackage it in infinite varieties, bending and tweaking it to fit the limited range of a hearing-impaired person. Not surprisingly, digital systems costing $3,000 to $7,000 per pair--3 to 10 times more than many old analog aids--are shaking up the once-sleepy hearing-aid industry. Even in the U.S., where most insurance policies don't cover the devices, the advance over the miniature loudspeakers they're replacing is enough to lead the hard-of-hearing to spring for them. Jim Dimond, an 82-year-old from Morton Grove, Ill., spent $3,000 earlier this year on a pair of digital aids made by Phonak. ''I can go to plays, which I love to do and couldn't do before,'' Dimond says.

Digital devices now account for half the market in Scandinavia. In the U.S., with 2 million users of hearing aids, digital aids have doubled their market share this year, to 16%. More growth is coming as baby-boomers--many of whose ears were damaged by loud music--grow older. Digital devices that hide inside the ear should also ease vanity concerns. But the possibilities extend beyond the hearing aids. Computer links to cell phones or the Internet could increase the technology's appeal. Some Danish executives think the devices could be used as hearing enhancers--providing audio links, for example, to special effects in movies and concerts.

The Danes have long had a yen for audio tech. They were making top-of-the-line diagnostic tools a century ago. The modern industry got its big boost in 1953, when the government promised a free hearing aid for every Dane who needed one. With such help, Danish companies developed a name for market-leading products. Today, Denmark bristles with audio labs. Bang & Olufsen ranks among the elite makers of stereo gear. Nokia and Sweden's Ericsson run big research labs near Copenhagen. ''This is 'Audicon Valley,''' boasts Jens Bernsen, managing director of the government-funded Danish Design Center.

The Danes will have to sprint to keep their lead in this new branch of the computer industry. All three companies are focusing not only on the technology to shrink and enhance microchips but also on the science of hearing. The digital devices compress the world of sound into a tiny range. While unimpaired people can pick up anything from a whisper of 20 decibels to a jackhammer at 120 decibels without distortion, a hard-of-hearing person may hear nothing until 70 decibels, while noises over 90 decibels can hurt.

With the basic technological leap done, the race is to refine devices that sift through the multitude of sounds presented in a given environment, choose the ones that matter, and redeploy them in ever more sophisticated ways within the user's range. This means focusing on a speaker or a singer while suppressing background noises--the coughs, ceiling fans, and clinking glasses.

COMFORTABLE LEAD. When Widex and Oticon were racing to produce the first devices, they worked on different ideas of what users needed. Oticon aimed for clarity, zeroing in on hard-to-distinguish sounds such as ''T,'' ''F,'' and ''S.'' ''We wanted to boost the consonants,'' says Jens Frederik Olsen, a product manager. Widex focused on comfort. With longer-lasting batteries and a device that fits more fully inside the ear, Widex ran away with the market. It still has half the worldwide digital business, which is expected to reach 800,000 units of the 4 million pairs sold globally this year.

While Widex and Oticon jousted, GN Danavox harbored greater ambitions. In the mid-1990s, it teamed up with John Melanson, president of AudioLogic in Boulder, Colo. Melanson, whose father was hard of hearing, spent a year in GN Danavox's Copenhagen labs. The result, released last fall, is a computerized hearing aid with a full operating system. The advantage is that new technology can be loaded as software; competing systems need pricey new microchips. The GN Danavox device includes a diagnostic program that produces an audio profile of the ear. A technician can then load custom programs for each ear. Danavox says its devices, at $4,000 per pair, take digital hearing aids to the next level. Competitors sniff that they add complexity.

Given the ferment in Denmark's mini-computer industry, more such leaps should be coming soon from Copenhagen. And they may not be limited to hearing aids. Word of them may well carry far beyond the hard of hearing.

By Stephen Baker in Copenhagen, with Ann Therese Palmer in Chicago

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