Music: Taking a Bite of Apple's Action


As digital entertainment goes, the undisputed star in recent years has been Apple Computer's (APPL) line of iPod handheld music players. And you wouldn't know it from all the attention the little device is getting, but dozens of outfits making rival MP3 players are trying to undo Apple's lead.

Competitors such as privately held Rio Audio of Santa Clara, Calif., which is very close to Apple headquarters, figure iPod won't be all things to all people. It hopes to nibble away some of Apple's dominance. Like other small players in the business, Rio has a partnership with Microsoft (MSFT) to use its Windows Media Audio software.

Nonetheless, Rio faces an uphill struggle. It's a distant second to iPod and has a fraction of Apple's resources. "Our way to execute is to design the right product at the right value and then use any kind of buzz we can take advantage of," says Hugh Cooney, Rio's president. In the nine months ending this September, Apple's iPod accounted for 54.7% of total digital-music-player units sold, vs. just 8.9% for Rio. Says Stephen Baker, analyst at market research outfit NPD Group: "It's tough to maintain that [low] level of market share over the long term."

Rio's vice-president for marketing, Dan Torres, recently spoke with BusinessWeek Online reporter Amy Tsao about his company's plans to catch the competition. Following are edited excerpts of their conversation:

Q: How are the holidays panning out so far?

A: It's turning out quite well. We brought some of our newer products to the market a little later than we wanted to, so retailers have had less time with them than we expected. However, they're more than meeting our expectations in reorders. We're seeing a very upbeat holiday. We're not prepared to offer dollar figures. But I would say we're on plan.

Q: How are you competing with Apple's iPod?

A: When we look at the entire space, Apple makes only a hard-disk player. We have a new hard-disk offering in the Carbon 5 gigabyte. It's a little hard for us to figure out what share we're taking from them, but we're competing with them directly. And we've seen Carbon doing quite well, but it's still way early. We need to ride this season out and see. So far, we think we're doing quite well, and we'll be taking share away from iPod mini.

Q: What about Dell (DELL) and Microsoft?

A: Dell is about cost. They really are a follower. They drive down costs of certain things. It's more about [whether they will] continue to drive pricing down, but they don't really change the landscape.

Microsoft is interesting. With its Windows Media Player, it will have a significant role in changing behaviors.

Q: What will happen to the market if Apple comes out with a flash-memory-based player?

A: I think there will be a combination of things. It will be interesting to see how they change their position in coming into that market. Will they go after sports, which is one of our targets? It will be an interesting addition to the market. Apple will call attention to the importance of flash. Just a year ago they had said flash is pass?. [See BW Online, 11/11/04, "The Word on the Next iPod: Flash".]

Q: Is consolidation coming among makers of digital music players?

A: No. I think what we're seeing is even more diversity. We haven't seen anyone fall out of the market. I think we see people starting to differentiate on a variety of characteristics, whether it's about branding, youthful market, or price. Companies are looking at music and audio to enhance their product offering, like Dell [did], or coming to music because there's a competency [within their company] and a natural attraction to audio.

We don't see consolidation happening yet. We'll still see more innovation in the space.

Q: Who do you see as your main audience?

A: We break it down into three key segments. One is the music enthusiast, who's younger and motivated by [having] more audio choices. A second segment wants to fit music into their lifestyle. They want audio, but it's not important. They're more about the experience of getting music into the player easily. It's about ease of use for them. [For the] third segment, music is a motivational companion. That's the sports and fitness user.

Q: Which of these markets holds the most untapped potential?

A: We believe the most opportunistic market is the ease-of-use users. We think our Carbon is the type of compact device, at 5 gigs, that fits that need. It's for someone who wants 1,200 or so songs. They want enough music to listen to without repeating. This is a very broad market.

Q: But the buzz around your products isn't even close to iPod's. How can you change that?

A: For not having the profile of Apple, we do well in getting people's attention. People have been looking at our product as something that finally challenges iPod. It looks different. These devices are very small, very precious. When you get them in your hand, customers really take to them.

We also have things that really matter to customers, like compact size and 20 hours of battery life, which is really important in the hard-disk market. You can plug a Rio into a Windows machine, and it mounts up automatically without any extra software.

Q: What kind of growth do you expect from Rio players?

A: Ultimately, mobile entertainment is the space we deliver on. Right now we're focused on being best-in-class for mobile audio. We'll grow with the market -- by about 40% in the flash space over the next two to three years. We're seeing unexpected demand in mini hard disks.

And the dynamics will eventually change from just being audio. People will start looking to having other features and media on more compact and smaller storage sizes.


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