The Replacement for the CD?


In December, 2000, a small Colorado startup unveiled a tiny storage disk -- the size of a quarter -- that it claimed would grab major market share from the traditional compact disk. The DataPlay disk stores 500 megabytes of memory, nearly the same as much larger CDs. And DataPlay would come with the built-in piracy protections that labels loved, as well as the capability to burn and play back music files stored in the popular MP3 format.

Right from the start, the Boulder-based company had plenty of executive muscle. Chief Technology Officer Dave Davies had helped to develop the world's first commercial CD-ROM. Chief Marketing Officer Pat Quigley had been the CEO of Capitol Records Nashville, managing and promoting stars like Garth Brooks and Mindy McCready. They had funding from heavy-hitters, including consumer-electronics manufacturers Toshiba and Samsung Electronics, data-storage medium maker Imation Corp., and Big Five record label Universal Music Group.

COMPETITORS. Still, at the time, their quest looked quixotic. A similar product, Sony's Minidisk, had failed to catch on in the U.S. market. Other technologies, such as flash-memory modules, had already made headway with consumer-electronics companies. CD burners had finally become cheap enough to go mass market.

So why, six months later, are analysts still touting DataPlay as the next wave? The answer lies in the way in which the company has positioned itself for quick market penetration, the rising popularity of downloadable music, and the labels' quest for safeguards against piracy.

For starters, the company has nailed down the crucial record-label connection. Big labels EMI Group and Bertelsmann Music Group have joined Universal in agreeing to offer their content on prerecorded DataPlay disks. That's three out of the Big Five. The labels plan to release as many as 300 albums on DataPlay disks before Christmas. The exact titles will be announced in August.

IN BOTH CAMPS. Two of the labels, EMI and BMG, are participants in the MusicNet subscription service, while Universal (which has since been purchased by French conglomerate Vivendi) has thrown its hat into the press-and-play service with Sony Music Entertainment. That means DataPlay will have advocates in both of the key music-subscription camps.

This represents a marked contrast to other, newer memory standards, most of which have struggled to secure big content deals and compete with pre-recorded CDs. Such deals are key, as the main barrier to a new format's entry into the market is the lack of content, says Lawrence Lazare, new technologies and digital media manager at books and music retailer Borders.

DataPlay also has a leg up in the retail part of the equation. According to Quigley, it has support from 81% of major music retailers, which plan to sell prerecorded DataPlay disks from big record labels. That includes the nine largest music retailers, according to the company. The upshot? DataPlay gets automatic visibility and access to music fans, as well as the added promotions from retailers.

HIDE & SEEK. Cost is another plus for DataPlay. Blank disks will retail at around $5 for 250 megabytes and $10 for 500 megabytes. That's more expensive than burnable CDs but far cheaper than flash memory modules. The playback devices will cost an affordable $99. A DataPlay prerecorded album would cost about as much as a prerecorded CD, according to the company.

Also, the smaller disks will offer bells and whistles that the recording industry wants. For example, each song on a disk is encoded separately. Once written, the disks can be programmed to prevent copying, or to allow a limited number of copies. "DataPlay has the ability to create individual rules for individual labels," says Quigley. Furthermore, DataPlay will avoid one of the bugaboos of building security into CD players, which lack a standardized antipiracy system. Since DataPlay will start from scratch with its players, consumer electronics companies will be able to incorporate a common antipiracy standard.

DataPlay encryption gives the disks a "hide" feature. So if a customer buys a DataPlay disk with, say, one Spice Girls album, the disk could contain all of the British pop band's tunes as well as music videos and interview clips. To access the additional content, the consumer would go to a designated retailing Web site and pay for the extra albums and videos. The customer would then get a special pass code that would unlock the bonus content, says Ted Coen, vice-president for new media at EMI, the world's leading music publisher.

NO HIGHS OR LOWS. How can they jam so much music onto a disk that is not only much smaller than a CD but also comes with one-third less memory? The answer is simple, even if the technology that makes it possible is not. By filtering out the very highest and lowest notes -- the ones only your dog can hear -- a DataPlay disk can be stuffed with five CDs worth of music.

The obvious sales target for DataPlay is teens, who have long valued convenience and portability. Quigley suggests they might carry their DataPlay disks on key chains and necklaces, or exchange them in school. "We are confident it's going to be successful," says Larry Kinswell, president of e-labs at Universal.

DataPlay hopes to sell 7 million DataPlay players and 70 million blank disks in 2002. It has already embarked on an ambitious effort to design DataPlay players into everything from PCs to cell phones to gaming devices. The company hopes to become profitable by the end of 2002.

FLASH FLOODING. That's an ambitious projection and the company will have to work hard to carve out a major market niche. Some analysts tout flash products -- with the most being Sony's Flash Memory Stick -- as a bigger player. Flash-based memory handles heat and motion better than CDs or DataPlay disks.

And although flash memory modules cost almost 50 times more per megabyte than DataPlay and 100 times more per megabyte than burnable CDs, the costs of all memory types should plunge and become more competitive in the next few years. Tech consultancy Web-Feet Research estimates that sales of flash technologies will outstrip DataPlay by a long stretch by 2005, as Sony muscles up sales.

Getting into this market might not end up as a zero-sum game, however. Consumers clearly love CD technology. While sales of prerecorded CDs have stagnated, millions of listeners now burn downloaded songs onto blank disks, and with hundreds of millions of users worldwide, CD players will surely be difficult to dislodge. Finally, several formats -- including Sony's Memory Stick, DataPlay, and CDs -- could co-exist, used in different devices and for different purposes.

Competition will be cutthroat, but DataPlay's backers remain confident. The company secured $55 million in additional funding in early June and struck a deal with blank CD distributor Imation on June 19. The first big test of DataPlay will come this fall when Borders plans to launch brand-new downloading kiosks that will allow customers to record music on CDs, Memory Stick, and DataPlay. This will allow the mediums to compete directly and give the tiny disks a chance to impress consumers.

Soon, teens may be playing music on disks that jingle in their pockets with their change. By Olga Kharif in New York


Steve Ballmer, Power Forward
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