Outlook And Growth Drivers

By Staff On Jan 8 2007 - 8:00am

TWICE: How did the MP3 player (and video-capable MP3 player) market grow in 2006, and what is the outlook for 2007?

Duea: In 2006, we saw the beginning of a new revolution occurring in portable music devices — the shift to the music-enabled cellphone as the primary music playback device for consumers. While U.S. shipments of stand-alone MP3 players increased from 32 million units in 2005 to 43 million units in 2006, the projections for these stand-alone MP3 players going forward is flat. For example, projected U.S. shipments of the stand-alone MP3 player in 2007 is 45 million units, and the unit shipments remain flat at that level through 2010.

However, in dramatic contrast, U.S. shipments of music-enabled cellphones grew from 7 million units in 2005 to 20 million units in 2006 with a projected compound annual growth rate going forward through 2010 of 72.2 percent. Moreover, U.S. shipments of music-enabled cellphones will surpass shipments of stand-alone MP3 players within 18-24 months and, in 2009, the units of music-enabled cellphones shipped in the U.S. will be more than twice that of stand-alone MP3 players. The same revolution is occurring in Asia and Europe and, in some cases, the shift in these markets is even more dramatic.

When we look at the shipments globally, the shift is even more dramatic. Last year, there were 872 million cellphones shipped and 87 million were music-enabled. That means there were more music-enabled cellphones shipped this past year than the 70 million iPods sold worldwide history-to-date. This coming year there will approximately 1 billion cellphones shipped, and it is projected that around 25 percent of these phones will be music enabled.

Sakuma: It's obvious that the MP3 category enjoyed double-digit robust growth in 2006 — greater than 50 percent year-over-year. For 2007, we believe industry growth in this category will slow. But it's also important to realize that there are literally millions of consumers who do not have an MP3 player or are scared off by the complexities of digital audio. By our estimates about two-thirds of households don't have an MP3 player. Some people will never manage their music on computer.

So we at RCA are focused on MP3 solutions that make it easier for more consumers to go mobile. We offer something for everyone — bookshelf audio systems that rip from CD to an MP3 player, a full line of affordable MP3 players, and new bookshelf and clock radio products with iPod docking capability. The big news in 2007 for stand-alone MP3 players will be wireless freedom — finally cutting the cord between the player and the headphones.

TWICE: What accounts for MP3 players' growth?

Duea: The dramatic growth rate is not with regard to stand-alone MP3 players. The dramatic growth is with regard to shipments of music-enabled cellphones with a U.S. projected compound annual growth rate going forward through 2010 of 72.2 percent. I think the growth rates are there because you now have music PC and mobile catalogs, such as Napster's, of over 2 million songs. You can get unlimited music legally for less than $15 a month — you have cutting-edge devices like the Cingular Sync by Samsung at the amazing price of $49.99. There are excellent broadband networks available both to the PC and to the mobile phone, and carriers — like Cingular and DoCoMo — are spending money to educate consumers about what is possible with Napster and your music-enabled cellphone.

Smith: The market drivers for this market are falling prices, expanding features and new options for content. The combination of these things will continue to push MP3 and PMP player sales.

Sakuma: Many things have contributed to the growth rate. While Apple's advertisements have made more people aware of the category, there are other factors. [Authorized] downloads are a relatively small part of the puzzle. Word-of-mouth is adding to category growth. Improved ease of use is a factor, too. You don't need a degree in information technology to take advantage of digital audio. RCA will continue to introduce new ideas that harness technology but keep it simple for consumers.

TWICE: How long can MP3 player growth continue?

Duea: Growth with regard to music-enabled cellphone will be dramatic and will continue through at least 2010 at a projected compound annual growth rate going forward through 2010 of 72.2 percent. However, when we look at projected U.S. shipments of stand-alone MP3 players, there is not much growth projected. For example, projected U.S. shipments of the stand-alone MP3 players in 2007 is 45 million units, and the unit shipments remain flat at that level through 2010. The U.S. shipments of music-enabled cellphones will surpass shipments of stand-alone MP3 players within 18-24 months and, in 2009, and the units of music-enabled cellphones shipped in the U.S. will be more than twice that of stand-alone MP3 players.

Sakuma: We anticipate the industry will flatten out, and there will be some saturation. The basic consumer who wants an MP3 player probably owns a player. We believe that most iPod sales are now replacement or additional sales, so the real question is this: "What's it going to take to get the next demographic to purchase?" The answer is simplicity, affordability and new functionality to attract more consumers.

TWICE: What were the strongest MP3 player price points in 2006, and what do you expect for 2007?

Duea: In 2006, Napster experienced solid market traction when we introduced a music bundle where a consumer received a free stand-alone MP3 player when they purchased three months of Napster To Go. Consumers also had the option to upgrade their stand-alone MP3 player for an additional sum. This music bundle resonated with consumers as many consumers were looking for a device that worked with Napster To Go at a reasonable price. Our approach allowed them to get both the device and unlimited music.

In 2007, you can expect us to continue with similar bundles, but you will also see us increase our attachment of Napster To Go trials with music-enabled cellphones. We now have Napster To Go trials being promoted by DoCoMo with its handsets and Cingular with its music-enabled handsets. You will see much more of this from Napster in 2007.

Sakuma: RCA's strongest sales were in the under $99 category. The RCA brand resonates well with consumers who want an affordable MP3 option from a reputable brand name. We tend to do better with the late adopter consumer who is more focused on price points and good value for the money. That same philosophy will come into play in our 2007 lineup — the RCA Gem Series of MP3 products. We'll have very affordable options for consumers and a higher-end solution that "cuts the cord" between the headphones and the MP3 player itself.

TWICE: What accounts for PMP players' growth?

Bruce Eisen, CinemaNow: We believe that PMP purchases and usage will grow significantly in 2007 due to greater selection of video content from CinemaNow and other sites as well as greater power and functionality of PMPs. CinemaNow is actively working with a number of OEMs to achieve tighter integration between device and content. The market has been very clear that this is what the consumer desires.

Duea: Portable media players need to be affordably priced and more portable than the PC laptops that can handle similar functions already. They also need to have colorful and engaging screens so that the consumer does not have to make huge sacrifice in the viewing experience when they opt for greater portability than their laptop. Also, there needs to be a significant amount of interesting, legal content.

Like we are seeing with the revolution in the shift to the music-enabled cellphone as the primary music playback device for consumers, I expect the big wave of growth for PMPs to come on the mobile phone. Already, you are seeing beautiful music-enabled cellphones from Samsung, Sharp and other that not only provide excellent music playback but also provide an engaging and portable video experience. We have already publicly stated that our roadmap for Napster Mobile will include music videos. The carriers are also already debuting interesting video offerings outside of music. So, for PMP growth, I would watch what is happening in the mobile space — literally.

Smith: The market drivers for PMP devices are similar to MP3 players: lower prices, expanding features and significant content options. Some of the features that are making our devices even more appealing to consumers are additional converged technologies: Wi-Fi and touch-screen options on a PMP. Now, consumers can carry thousands of media files — TV shows, movies, music and photos — on the device they use to surf the Web. The devices are easier, faster, slimmer and more cost-effective than ever before.

Archos as an international company has grown tremendously over the past year, and PMPs are the company's revenue drivers. We've seen a 61 percent increase in sales in the U.S. over last year. This is the fastest growing region in the world for Archos and can be attributed to strong market demand and to expanding our retail presence more than 70 percent or our devices. This shows a maturing of the PMP market but still with several opportunities for growth ahead.

Sakuma: This category has yet to take off. While we have offered PMP products for more than two years, it remains a niche market. As with MP3 players, we don't believe PMP will take off until there is a quick and easy method of loading content into the device. For most consumers, they worry about how much time and difficulty it will take to fill a device with content.

PMPs are not going to replace the family TV. They are a convenient travel accessory, and will someday be a way to move content throughout the house — the same way that you might take a DVD today from room to room. Household broadband penetration is growing, but even at today's fastest speeds, it takes a lot of time to use the Internet as a source for content on a PMP. That's why the involvement of cable, satellite and telco operators is key to this product's future. Filling up the PMP device from a set-top box can be a very fast process once the right elements are in place.