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Cash crunch puts media format on hold

DataPlay, a start-up that developed a secure new media format it expected would replace the CD, shuts down at least temporarily as it looks for new funding.

DataPlay, a start-up that developed a secure new media format it expected would replace the CD, has shut down at least temporarily as it looks for new funding.

Todd Oseth, the Boulder, Colo.-based company's senior vice president of business and marketing, confirmed that all employees were furloughed last week after DataPlay ran out of money.

DataPlay's discs are about the size of a quarter and can hold up to 500MB of data, or 11 hours of music, and include security features to prevent unauthorized copying of music. Major record labels have supported the format, and DataPlay expected to have discs featuring artists such as Britney Spears and N'Sync on the market by the end of this month.

The company, which has raised $120 million to date, needs $40 million to $50 million to complete the next phase of operations, Oseth said. Numerous funding sources have expressed interest, but not enough to fill out the round, he said.

"In general, whenever you're raising money, people want to see a plan, and they want to make sure the total amount of money is available," Oseth said. "If you don't have the last little bit, nobody's going to commit."

Oseth added that this is a financially demanding time for the company, as it moves from research and development to putting finished products on the market. "It's kind of sad," he said. "It's like having a race car come to the start line without any fuel."

The company's 120 workers--down from 240 after a round of layoffs in July--were notified of the furlough last week. Workers with vacation time or sick leave are using that in the interim, while others are on unpaid leave. Oseth said the company hopes to be able to tell employees by the end of the week when they can return to work.

Analysts have said that although DataPlay's format has a number of improvements over CDs, it's unlikely to catch on unless a major consumer-electronics manufacturer adopts it, as Sony and Philips did more than two decades ago with CDs.

"When Sony and Philips introduced the CD, they could afford to just sit on it while consumers slowly accepted the new format," said Ryan Jones, an analyst for research firm The Yankee Group. "DataPlay just doesn't have those relationships right now."

Jones said he expects the DataPlay format to disappear for now and possibly be resurrected by the electronics industry.

"If the major electronics manufacturers are smart, they'll wait for a DataPlay fire sale and pick up the technology that way," Jones said. "Then someone like Matsushita can take the time to promote it to consumers."

The first products based on the DataPlay format--a portable music player made by iRiver and blank disks from recordable media specialist Imation--appeared on the market earlier this year.

While DataPlay has initially focused on music, the discs were expected to have other applications, including digital photography. Initial investors included photo giants Eastman Kodak and Olympus, along with semiconductor titan Intel and musician David Crosby.