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Diamond a player in MP3 market

In spite of the MP3 controversy, Diamond Multimedia's Rio portable player has shipped 100,000 units since its November launch.

When introduced, many predicted Diamond Multimedia's Rio portable MP3 player would transform the distribution model for music, but not everyone expected the device could end up transforming Diamond itself.

Diamond made its name in multimedia hardware like graphics and communications subsystems sold to chip and PC manufacturers. But the company seems to be garnering more attention, at least among consumers, for its Rio portable MP3 player, introduced last year.

Rio is a portable player for MP3 sound files. MP3 (MPEG1, Audio Layer 3) is a format for compressing high-quality sound files so they can be downloaded quickly onto a PC hard drive. The format and Rio have faced stiff opposition from members of the recording industry, who are worried about potential piracy problems.

Rio's release was almost thwarted by the Recording Industry Association of America. The industry group attempted to delay the release of the Rio by filing for a temporary injunction. The motion was denied in early October. The RIAA is expected to file an appeal.

Regardless of the controversy, since its launch in November Rio has shipped 100,000 units, according to Bill Schroeder, CEO of Diamond, who spoke yesterday at the NationsBanc Montgomery Securities Technology Week conference in San Francisco.

Rio, which is about the size of a pager, stores roughly 60 minutes of MP3-encoded music on 32MB of memory. Because Rio uses no moving parts, the device is more rugged than portable CD players, which tend to skip when jostled.

Rio, and its companion Web site, RioPort represent a growing revenue stream for the company, Schroeder said to the crowd of financial analysts and investors. RioPort, which aggregates MP3 Web sites and information, will eventually leverage Diamond's presence into digitally integrated homes, and generate revenues through banner advertising, he said.

Schroeder said Diamond intends to maintain its traditional business in graphics, video, and audio hardware while investing resources into digital music players, home networking hardware, and broadband connectivity solutions.

"We want to extend out of the hardware-only model," he said, comparing the company to razor manufacturers who receive most of their profit from razor blades. Under this model, the Rio represents the razor, with the RioPort Web site representing the more profitable blades, he said.

Rio and the RioPort Web site are "breakout" products and represent a "developing revenue stream," unlike the company's more established "tuning," or commodity products like graphics subsystems, he said.

Diamond's stock was up five percent today to 7.8125 following Schroeder's pep talk at the conference.

Although firms like Samsung and Saehan have marketed MP3 players in Korea, Diamond has enjoyed a "first mover advantage," thus far as the only U.S manufacturer of the portable MP3 player, according to Schroeder, but increased competition is expected by the end of the year.

The next generation of Windows CE-based palm-size PCs are among the potential competitors, because they can download MP3 players. However, in most standard configurations these Windows CE devices only come with 8 to 16 MB of memory, limiting the amount of music that can be played back.