Creative readies MP3 player

On Monday, Creative Labs will roll out its first MP3 player, said industry sources, joining a market currently dominated by Diamond Multimedia's Rio player.

Creative Labs' device, dubbed the Nomad when a prototype player was first unveiled last month, will hold about an hour of near-CD quality music, which is twice what Diamond's player can store, said industry sources. The device, unlike the Rio, can also record voice memos and show the title of songs on a small LCD display. It is expected to cost less than $200, sources said.

Users can download a growing supply of both legitimate and pirated music titles in the MP3 (MPEG 1, Audio Layer 3) audio compression format, which allows users to download music tracks and save them onto a PC hard drive or an expanding array of newfangled portable MP3 players.

Creative declined to comment.

For Creative, the move is an effort to capitalize on the mushrooming interest in MP3 as intense competition in the market for graphics and sound subsystems guts the company's profits. But MP3 alone isn't likely to save the company, analysts say, and consumer electronics industry giant Sony is looming as the 800-pound gorilla in the nascent market for portable digital music players.

Sony has talked of plans to bring out its own take on the "digital Walkman" market, reportedly within the year. The device would use Sony's own Memory Stick technology for added storage capacity instead of the industry standard Compact Flash memory storage technology, in part due to Sony's concerns over music piracy.

Diamond said recently it has already shipped over 100,000 units since the Rio's launch late last year, despite a messy legal battle with the recording industry, which was seeking an injunction against Rio's distribution until better safeguards against piracy were in place. That battle could heat up again with Creative's new player, but analysts say the incentives for jumping in outweigh the negatives.

"There's no question that it makes sense for Creative and Diamond to get out in front of the market even without music industry's endorsement. If MP3 does continue to be the predominant standard, they'll have cashed in early on what will be a massive market," said Lucas Graves, analyst with Jupiter Communications

Creative has long been one of the leaders in providing audio functions to the PC. Supporting MP3 is a natural, if not inevitable extension of their core business.

At the same time, Creative has been hit hard by competition in the graphics and peripheral markets. Last June, the company warned that its fourth fiscal quarter 1998 earnings would be below expectations due to competition in both the 2D/3D chip market as well as the audio market. Since then, Creative has seen margins, and profits, tighten.

For the first fiscal quarter of 1999, which ended last September, Creative reported lower revenues and profits. For the second fiscal quarter, which ended in December, the company saw a slight bump in revenue, but earnings were down once one-time charges were excluded.

Sony, on the other hand, can afford to wait on the sidelines for playback technology that offers its enormous music catalog more protection from piracy, Graves said.

"Availability of digital hardware is one key component [to the growth of online music distribution], but the missing ingredient is [unpirated] content," he said. Backing from companies like Sony-"That's what'll rip the lid off of the digital music market in the long run."