January/February 2006

By Robert E. Calem

The Apple iPod is to portable digital audio players as Kleenex is to facial tissues: a brand that is synonymous with a product category. Moreover, with the introduction of video playback capability in the fifth generation iPod late last year, the iconic iPod also may become synonymous with the portable digital video player product category.

Of course, Apple is not the only brand selling either portable digital audio players or portable digital video players. Both products, now lumped together under the moniker “portable digital media players” (PMPs or DMPs), were pioneered by other brands.

But against the Apple juggernaut, is it game over for these other brands of PMPs or DMPs?

The answer is a resounding “No,” according to industry analysts, who say the market remains wide open to innovative competitors—particularly in the video arena—if they properly promote their products and support them with the right content.

The problem is, experts say, the competitors have not done that yet. Still, there were innovative PMPs introduced last year, and more will be seen at the 2006 International CES.

Status Quo Apple

Apple was not the first to market with a digital audio player—the first such devices were introduced in 1997. However, Apple got four important things right when it introduced the iPod in 2001, says Susan Kevorkian, program manager for consumer audio market research at IDC in Framingham, Mass. First, Kevorkian says, the iPod featured a straightforward user interface. Second, it was attractively designed. Third, it was promoted with clever marketing. And finally, beginning in 2003, it was supported by a additional source of music—the iTunes Music Store—besides the ability of users to import their own music to the device.

“No single competitor has been able to upstage Apple in all of those qualities simultaneously,” Kevorkian declares. Competitors have had difficulty not only matching Apple’s success, but exceeding it, she adds.

“Apple is really the only brand that consumers are familiar with,” says Dale Gilliam, director of primary research at The Diffusion Group (TDG), a Dallas, Texas-based consumer technology research and strategic marketing firm focused on the connected consumer and new media. In their minds, “it’s iPod or it’s something that looks like an iPod,” Gilliam says.

Many iPod owners chose that device because Apple “was the only brand [in the category] with which they were truly familiar.``

“The brand and the device are virtually synonymous in the mind of many consumers—that is, many consumers know portable digital music players as ‘iPods,’ as many of us know facial tissues as ‘Kleenexes’,” Gilliam wrote in a TDG report titled “Understanding the iPod’s Dominance: A Consumer Perspective.”

Today, according to the TDG report, Apple has a 75 percent share of the U.S. portable digital audio player market in terms of U.S. household penetration, and more in terms of sales, because some households own more than one iPod.

Half of all households with a PMP own an iPod, TDG says. By comparison, TDG says, 14 percent of PMP households own a model from Sony, 12 percent own a Rio-branded model, eight percent own a Creative-branded model, seven percent own an iRiver-branded model and another seven percent own a Panasonic-branded model.

Yet, although Creative, for example, has been selling portable digital audio players much longer than Apple, many iPod owners chose that device because Apple “was the only brand [in the category] with which they were truly familiar,” Gilliam wrote in the report. Thus, he stated, “competitors hoping to gain market share must focus on branding and consumer messaging.”

To be sure, Apple’s competitors have not stood still, both Kevorkian and Gilliam say. Creative already had introduced its second-generation portable media (video plus audio and pictures) player by last October, when Apple rolled out its first iPods with video playback capability, Gilliam notes.

Nevertheless, Gilliam says about Creative and other makers of portable digital video players, “If they’re not careful, they’re going to end up looking like a generic video iPod” even if they were in the market first. I think it turns into more of a marketing issue than a device issue.”

Kevorkian notes that even industry giant Microsoft has not been able to raise the profile of its PlaysForSure program, which was introduced in 2004 and ensures that PMPs based on the company’s Windows Media Audio and Windows Media Video technologies work with copyright protected content available from a variety of Web-based vendors. In fact, Gilliam notes, Creative used Linux— a free and open operating system—rather than Microsoft’s Windows operating system in its second-generation portable media player, named the Zen Vision.

Similarly, Josh Martin, an associate analyst at IDC who covers the PMP and portable digital video player markets, identifies a shift toward Linux as a major trend. He calls it noteworthy that Microsoft did not release an updated design for Windows-based Portable Media Center devices, and does not believe Creative will return to using Windows in another new PMP model soon because that would confuse customers.

Content Discontent

The experts say, the success of PMP makers competing with Apple will depend upon the availability of content that plays on their wares. With the introduction of video playback ability on the iPod, Apple is “controlling the spotlight,” says Gilliam. “Everybody has to respond to what Apple is doing,” he says.

“The devices and the content still aren’t ready for primetime,” Martin says.

When PMPs were first introduced under the Windows PMC label in 2003 by companies such as Archos and RCA, and even in 2004, there wasn’t enough content to play on the devices, Martin says. Now, he laments, “The processes for acquiring video through various sources are not user friendly yet.”

Online services that compete with the iTunes Music Store and offer access to audio content for a monthly subscription fee have been slow to gain consumer acceptance, because consumers are accustomed to owning their music collections, Kevorkian says; these services cut off the user’s access to his music collection when the monthly subscription fee is not paid.

Going forward, video-oriented PMPs are likely to face similar content dilemmas, the experts say.

“There hasn’t been a wealth of content available for video PMPs,” says Steve Koenig, CEA senior manager of industry analysis. The video-enabled iPod changes that, because Apple has added video in the form of TV show episodes and music videos to the iTunes Music Store. Nevertheless, Koenig says, “What is unproven is if consumers are going to demand video on the go as much as they had music.” It also is unclear, Koenig says, whether consumers will be willing to pay at least two dollars for each piece of video content—the fee Apple is charging for a TV episode purchased from iTunes—which is twice as expensive as a typical piece of downloaded audio content.

Koenig says he believes that what is needed to build the market for video-oriented PMPs is exclusive video content or content with unique twists, such as TV shows offered with alternate endings or out-takes.

Among the newest features in PMPs last year was the ability to record video directly to the devices from a television or other video source, and more PMPs with this feature are expected to be shown at the International CES.

According to TDG’s research, few consumers are willing to pay either a monthly subscription fee or a per-download fee for mobile video content, and they’re also unwilling to purchase a new stand-alone mobile video player. So, TDG predicts that it will be years before PMPs—especially those primarily oriented toward video—will sell in any significant numbers. Multimedia mobile phones that can play video are much more likely to build a significant user base, Gilliam says.

Worldwide, IDC is predicting that PMP shipments will grow to 6.01 million units in 2009 from an estimated 376,980 last year and 175,250 in 2004. IDC also forecasts that U.S. portable digital audio player unit shipments will grow to 59.1 million units in 2009 from 23.7 million units in 2004.

CEA’s market research—which counts shipments of devices to dealers rather than sales to consumers—forecasted last July that U.S. PMP shipments in 2005 would total 15.9 million units, up from 7.1 million units in 2004. There were 11.2 million units shipped through August of last year, according to CEA. That was before Apple introduced the iPod Nano and the fifth generation iPod, and Koenig says that with sales of these devices the actual total shipments of PMPs in the U.S. last year could total 18 million units when the final count is completed.

So far, Koenig says, video-enabled PMPs have remained a very small segment of the total market—perhaps only three percent of all PMPs shipped. “The video iPod is going to change that dynamic,” he says, although “it remains to be seen how big an impact the video iPod will have.” There have been video-enabled PMPs with more features at a lower price that have not been able to gain traction in the marketplace, Koenig adds.

New Choices

Among the newest features in PMPs last year was the ability to record video directly to the devices from a television or other video source, and more PMPs with this feature are expected to be shown at the International CES. The feature goes beyond the capabilities of the fifth generation iPod, which can play only video that is downloaded from the Internet (and, in the case of TV shows, available starting a day after they’re broadcast on TV).

EchoStar’s DISH Network, the satellite-TV service provider, in October introduced three new PMPs and, according to spokesman Mark Cicero, is the first pay-TV provider to offer such a portable video device.

Branded PocketDISH, the line-up includes the AV402E ($329), which has a 2.2-inch LCD display and a 20-gigabyte (GB) hard drive; the AV500E ($499), which features a 4-inch widescreen LCD display and a 30-GB hard drive and a built-in speaker; and the AV700E ($599), which features a 40-GB hard drive, a 7-inch widescreen LCD display and built-in stereo speakers.

With all three models, it’s possible to transfer video at high-speed, via a USB 2.0 connection, from a DISH DVR directly to the PocketDISH, which automatically encodes the video with special digital rights management (DRM) encryption, Cicero says. With USB 2.0, one hour of video can be transferred to the PocketDISH in five minutes, he says. In addition the AV-500E and the AV-700E can be set to record TV shows directly as they’re broadcast, using a built-in timer to set up the recording in advance, or from another video source, such as a camcorder. None of the PocketDISH devices will record high-definition TV, Cicero says. However, he notes, transferring or recording TV to the PocketDISH costs nothing extra, while, for example, downloading a season of the TV show Desperate Housewives from iTunes would cost $45 (23 episodes at $1.99 each).

The PocketDISH models are based on similar models from Archos: the PMA400, PMA430, AV 500 and AV 700. The Archos PMA400 is the model with the 2.2-inch touch-screen display, and it can record video directly from a TV, VCR, cable-TV or satellite-TV receiver, and schedule recordings. It also features Wi-Fi and Ethernet for connecting to the Internet and downloading videos, as well as a 30-GB hard drive, a USB 2.0 host port, and “personal information manager functions” such as an appointment calendar and phonebook. The PMA430 is based on Linux, whereas the PMA400 is based on Windows. The AV 500 is the model with the 4-inch display and comes in versions with either a 30-GB or a 100-GB hard drive. The AV 700 is the model with the 7-inch widescreen display and comes with either a 40-GB or a 100GB hard drive. To record video, both the AV 500 and the AV 700 require an intermediary “cradle” that connects the device to the video source and also fees the video from the source to the TV.

One noteworthy accessory for the Archos AV 500 is the Digital Action Cam $199.95, a video camera the size of a lipstick tube that can be worn in a headband or perched on a stand. The microphone for the device is built into the cord that connects it to the PMP.

The next advance that Archos is pursuing is the ability to record high-definition video to a PMP that can play back equally high-fidelity audio, says Larry Smith, chief operating officer of Archos Inc. in Irvine, Calif. “We’ve been trying to keep ahead of the curve and to build the market as we grow,” he says.

Late last year, Samsung also unveiled a new PMP capable of recording video directly from a TV or other video source, and is expected to introduce more at CES. The first was the YM-P1 and features a 2-GB hard drive, a 4-inch widescreen LCD display and an SD Card slot. The anticipated models will feature screen sizes as small as 1.8 inches.

Handheld Entertainment, which sells the ZVUE line of PMPs, also plans to add video recording capability to new PMP models that will be introduced at CES, says Jeff Oscodar, CEO of Handheld Entertainment Inc. in San Francisco. Oscodar maintains that the company will pursue the “low-cost, high-value territory” with its products. There will be three new PMP models (five new SKUs) introduced at CES, priced well below the least expensive fifth generation iPod. The one PMP model ZVUE currently sells ($99.95) features a 2.5-inch LCD display and runs of four AA batteries—for eight hours when playing music and for six seven hours when playing video, Oscodar says. The new models will offer a larger screen size and range in price from $149 to $199.

By comparison, the fifth generation iPod with video capability is priced at $299 for the model with a 30-GB hard drive and $399 for the model with a 60-GB hard drive.

“I think you’ll see a lot of competition in this digital media player market,” Oscodar says. “I don’t think anybody should just cede the market to Apple.”

From music artists to music publishers to online music merchants, “Everybody is complaining they’re not making enough money,” says Matt Durgin, marketing manager for digital audio at Samsung Electronics America in Ridgefield Park, NJ. “It’s so competitive right now; we’re all trying to be a lower cost player with a higher featured device. Everybody’s making a little money; nobody’s making a ton of money yet. There are realities to competitive marketplaces.”