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Diamond sees a jewel in MP3 home system

The firm plans to create digital music players for the home, a move that could expand the market and also provide a potential "killer app" for the company's home networking products.

MP3 is coming home.

Diamond Multimedia has launched a plan to create digital music players for the home, a move that potentially will expand the market and could also provide a "killer app" for the company's home networking products.

The strategy largely derives from the popularity of the Rio portable MP3 player. Introduced last November, the Rio became one of the first MP3 players to capitalize on the digital music craze. Diamond is on track to ship nearly half a million devices by the end of the year, it says.

Going forward with the Rio, Diamond's plan is to connect a digital stereo to the rest of the home using networking products.

When it first launched, it wasn't clear how the Rio meshed with the company's core products like computer peripherals, modems, graphic cards, and motherboards.

Further, Sony, Philips, Samsung, and Toshiba have announced players, increasing the heat on the much smaller Diamond. Diamond also has felt pressure from the Recording Industry Association of America, which filed a lawsuit charging that the company's Rio portable MP3 player infringed upon copyright-protected material. The suit was later dismissed.

Rather than think of the Rio as a discrete device, the company now believes that the Rio will drive sales of the rest of its businesses. Diamond is also looking to parlay its success with Rio into the potentially much larger--and more lucrative--market for home networks, including its HomeFree Internet, printer, and file-sharing product.

This strategy was not part of the original plan. "The Rio was a simple straight-forward vision," said Reed, director of access products for Diamond. "But now it does fit in quite nicely with the rest of the company."

By whetting the public's appetite for digital music with a relatively inexpensive device holding between 10 and 20 songs, Diamond hopes consumers will see the value of digital music in the home, replacing CD players and radios with digital "jukeboxes" capable of storing thousands of songs.

"It's a nice bridge--Diamond brings to the table an understanding of the networking aspect and they're in the entertainment business, which gives them an advantage over other companies," said Boyd Peterson, an analyst with The Yankee Group. "We're at the stage of the market where everyone realizes the massive potential for home networking."

The company now sees MP3 music played on digital jukeboxes as the most compelling application for home networking. Households who may see no immediate need for connecting their refrigerator to their television to their computer may very well be compelled to set up a network to enable high-quality audio piped to every room without additional wires or cables, the thinking goes.

"This actually solves a problem people have," said Reed. "Music has a broad appeal--I bet that almost 100 percent of people like music." In a house with disparate music tastes, one digital jukebox could simultaneously pump different music into each room of the house, without rewiring the home for additional speakers or stereo equipment, he said.

The company is working on such a digital jukebox, he said, expected to be released in about a year. This type of home stereo would offer enough memory to house an entire family's music collection. This jukebox would be connected to digital speakers via power line network products-from Diamond, hopefully-which would then allow a family to play different songs in different rooms of the house simultaneously, from the same stereo.

To be successful, the company must convince consumers that the ability to play digital music throughout their home is compelling enough to invest in the time and expense of creating a home network. But that proposition is increasingly innocuous: with the advent of power line and wireless networking, the task of connecting appliances and devices is much less arduous than it was even a few years ago, analysts say.

"Last year, we were still defining the technology to see if it worked. Now, a lot has gone into making it user friendly," Peterson said. "We need to get to the point where people will set up home networks and not even know it if people had a home network and didn't even know they were LAN (Local Area Network) administrators."

Because this is still a nascent market and the company is competing with heavyweights like Microsoft, 3Com, and Cisco, who all want to define the networked home with their products, Diamond has a tough road ahead, despite the popularity of the Rio, analysts say. In addition, companies like Philips and Sony, who have each announced portable MP3 players, are also well suited to introduce similar MP3 products.

"It's more likely that each home will have a combination of platforms and devices, some of which might be Diamond or not," Peterson said. "That's why so much effort has been placed on interoperability."

With any grand Internet scheme, the obstacle of high-speed access must also be hurdled. Although digital music has the potential to drive sales of some network products, that will happen only after broadband Internet access becomes widely available and Internet connection sharing becomes widespread, analysts note.

"In theory, it's a compelling proposition," said Kevin Hause, an International Data Corporation analyst. "The reality though is that much more compelling than music is going to be sharing broadband connections."