Will Apple flash iPod rock market?

As rumors of an Apple flash iPod swirl, rivals say they hope a product by the Mac maker will ignite overall sales. Photos: iPods everywhere

Tech Culture
When IBM entered the PC market in 1981, Apple Computer took out a full-page newspaper ad welcoming its rival.

Today, with Apple reportedly poised to debut its first flash-memory-based music player after rocking the market for hard-drive devices with the iPod, some competitors are taking a similar laissez-faire stance.

"Welcome to the party," said Thomson Vice President David Arland, whose RCA brand is among the top three in U.S. retail sales.

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What's new:
With Apple widely expected to unveil a flash iPod in January, rivals say they expect the Mac maker's product to give them a boost as well.

Bottom line:
Analysts say hard-drive models will hold a large share of the MP3 player market as customers seek to accomplish additional tasks with their gadgets. But with Apple's iPod success record, many expect an Apple flash player to make a huge market splash.

More stories on the iPod

Apple, of course, ended up ceding the bulk of the PC market to IBM and other PC makers. But Thomson and others say they hope an Apple flash player will ignite sales for all concerned.

"When they've come in, they've always raised the water level," said Dan Torres, Rio's vice president of product marketing. "That's good for the industry."

Torres sees a flash iPod as a fait accompli, noting that suppliers in Asia have said Apple has been making purchases consistent with the development of a flash music player.

"We've been monitoring this for a while," Torres said. "We believe that it is not a rumor; we believe it is very true."

Apple is widely expected to announce a flash iPod at Macworld in January. But for now, the company has declined to comment.

Today, the flash market overall is larger in units than the hard-drive market, but it's split among a number of players. The largest share of the U.S. retail market over the past year belongs to iRiver, followed by Rio and RCA. Other players include Nike/Phillips, Samsung and Creative Technologies.

Tapping a 'tremendous market'
Arland and others say there is room for more than just Apple.

"While Apple has enjoyed remarkable success with the iPod, even with all of that, fewer than one in 10 households has an MP3 player, so there is a tremendous market," Arland said.

Apple was also not the first to offer hard-drive-based players when it debuted the first iPod in October 2001, but it now commands the lion's share of that market. In the U.S. retail market, the iPod accounted for more than 80 percent of sales in the 12 months ended this October, according to The NPD Group. That's up from about two-thirds market share in the same period a year ago and a 40 percent share in its first year.

Financial analysts predict Apple would sell millions of flash iPods in short order. Bear Stearns analyst Andy Neff predicted earlier this month that Apple will sell 6 million units in the current fiscal year and 13.5 million the following year, but at $160, a lower average price than Apple gets for its iPods (which retail from $249 for the iPod mini to $599 for the 60GB iPod Photo).

Looking ahead to next year, Neff forecasts Apple may be able to grab 30 percent of the 34 million players that market researcher IDC estimates will sell next year.

One challenge for Apple may reflect the words of the company's own CEO, Steve Jobs, who has characterized the current market for flash-based players as made up largely of products people get as gifts and never use.

But the landscape may be shifting, thanks in large part to memory becoming available at lower prices and in higher capacities.

"We're finally seeing individual flash devices now at the 8 gigabit (1GB) density, which is starting to get pretty significant," said Michael Maia, co-founder and vice president at Portal Player. "With that, in terms of just the economics, it's going to help get the prices down."

Forcing Apple's hand
PortalPlayer, whose chip powers the iPod, has historically focused only on the hard-drive market. But as flash capacities have grown, the company now has its eye on the flash market, an area where it will compete against chipmakers such as SigmaTel, which is rumored to be powering the flash iPod.

Many of today's flash players have no screen, or only a one- or two-line display that can show the current track and basic settings. Such players haven't needed an elaborate mechanism to navigate songs, because most players only held a few albums' worth of music.

"What we see, though, is a performance segment, or a mid- to high-end segment, that's going to be different," Maia said.

NPD analyst Stephen Baker said that flash will carve out a larger slice of the market, likely forcing Apple's hand.

"They have to get into it eventually," he said. "If you look at the reasons for success of the (4GB iPod) mini and the price value curve in flash, at some point soon you're going to get some flash players with some pretty hefty memory--2GB to 4GB--at price points that are between $149 and $199."

Flash players, because of their lower prices, have proved more popular overseas than in the United States. Still, Baker questioned whether now is the right time for Apple to enter the flash player market.

"I'm not sure they need to go there now, given that the (iPod) mini's only been out a year," Baker said.

Hard drives are seen as keeping a large share of the market though as customers seek to accomplish additional tasks with their players.

The 4GB to 5GB player is an area where the battle between flash and hard drive is likely to be most intense, as flash prices come down and capacities go up.

The iPod mini and rivals with similar size players use hard drives from Hitachi, Cornice and others. But flash memory is also becoming available in those sizes.

"It is going to, over time, fill the niche that these 1-inch hard drives are filling," said Joe Sipher, senior vice president of marketing for Virgin Electronics, which offers both flash-based and mini hard-drive-based players.

Baker agrees that flash could serve that niche well.

"The reason (mini hard-drive players) are popular is that 4 to 5 gigabytes holds a nice amount of music for most people--700 to 1,000 songs. Most people don't need a heck of a lot more than that," he said. "Coming out with 10GB drives (in mini hard-drive players) at $250 doesn't really do a lot for the market. People aren't looking for bigger capacities."

Hard drives are seen as keeping a large share of the market, though, particularly as customers seek to accomplish additional tasks with their players, such as view photos and watch videos.

Baker also noted the challenge Apple faces trying to grow its share of the overall MP3 market without cannibalizing sales from those who might buy a higher-priced hard-drive player.

If Apple offers a relatively cheap Apple flash iPod with 256MB or 512MB of memory and the iPod's music wheel and screen, it will be relatively easy for people to trade down to the less expensive player, Baker said.

Meanwhile, those in the flash market aren't standing still. One of the big advances they see is the emergence of subscription-based music, largely through Microsoft's Janus technology. That, they say, is something that makes flash players more attractive and is also something that Apple can't offer.

Having such a large selection also means that consumers won't be able to take all their music with them, perhaps making the prospect of frequently docking to a computer more palatable.

"Once Janus comes, you are going to have a million songs as your library," Sipher said.

Thomson is also looking at ways to address the roughly half of all households that don't have a PC, as well as people that don't use their computers to manage music.

"You are going to see from us a diversification of our lineup," Arland said. At January's Consumer Electronics Show, Thomson will introduce a bookshelf stereo system that can download music to a docked RCA Lyra MP3 player.

"That's ideal for people like my mom," Arland said. "She uses (a PC) for e-mail and eBay."

CNET News.com's John G. Spooner and John Borland contributed to this report.

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