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Cellphones Seen Making Music, Gaming Inroads

5/19/2006 12:30:00 PM Eastern

New York — Cellphones will offer up some stiff competition to dedicated MP3 players for consumers who want to listen to music on the go, according to ABI Research and the Yankee Group.

Sales of cellphone-based games will also grow dramatically by the end of the decade, the Yankee study found, but their sales will complement rather than compete with dedicated handheld game devices such as Sony’s PSP and the Nintendo DS. Cellphone games, Yankee found, appeal largely to casual Internet gamers and females, not to console gamers or CD-ROM gamers, who are predominantly male.

In a recent portable entertainment study, the Yankee Group concludes that the installed base of music-centric and music-storing cellphones will outnumber dedicated MP3 players for the first time in 2009. That year, the company forecasts that one half of all portable music players in use will be phone hybrids. "There is no hardware or software barrier to a killer music experience on a cellular handset," Yankee said.


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As a result, Yankee senior analyst Mike Goodman told TWICE, about 20 million to 25 million of the 65 million music-enabled cellphones in consumer hands in 2009 will be used as the consumer’s primary portable music device. "Cellphones will account for about 20 percent of the installed base of portable digital music listeners," he added. "It comes down to convenience."

It also will come down to timing. By 2008, dedicated MP3 player sales will begin to level off because of market maturity, and replacement sales will account for a large percentage of MP3 sales, he said. As many existing MP3 users begin to replace their MP3 players, many will opt for MP3-playing cellphones with lots of memory capacity, he continued. By 2009 or 2010, "it’s easy to see cellphones with 15GB to 30GB of flash memory," Goodman noted.

Yankee believes the potential consumer base for MP3 portables is about 70 million people, and by 2009, the installed base of dedicated MP3 players will already hit around 65 million.

During this period, most consumers will use their MP3 phones to play music transferred from their PC, with over-the-air music downloads to cellphones accounting for only 11 percent of total U.S. music-download revenue in 2009, Yankee also pointed out. "Dedicated digital audio devices will continue to be used more exclusively for their single purpose, while multifunctional handsets, including music-capable phones, will be used for a multitude of purposes and will therefore drive a smaller proportion of [music-download] revenue," Yankee explained.

For its part, ABI Research contended that mobile phones with tiny hard-disk drives "may soon allow the cellular handset to rival or surpass the portable MP3 player as the mass-market mobile music device of choice." Said ABI analyst Alan Varghese, "As the cellular handset becomes the one device that the world carries, the stand-alone MP3 player may well be left behind. What's important to many users is having one device that handles mobile music as well as the other functions — phone calls, digital photography, e-mail, Web browsing — now performed by mobile phones."

Most MP3 users, ABI said, load MP3 players mainly with music from their own music collections, not downloaded from authorized Web sites, and high-capacity MP3 phones will "provide users the flexibility of listening of listening to those tracks on a device that’s almost always with them."

As mobile phones morph into multimedia entertainment and computing devices, at least two phones available overseas — the Nokia N91 and Samsung SGH-i310 — sport HDDs with capacities of 4GB and 8GB, respectively. Dedicated MP3 players still deliver greater capacity up to 30GB and 60GB, but "there is a point of diminishing returns beyond which a user doesn't care whether the device can store 2,000 songs or 7,500," Varghese pointed out. "MP3 player vendors may try to defend themselves by offering even greater disk space, but over time they may still lose market share."

Neither phone is available in the United States, but the Nokia model is expected here in the second quarter at an approximate $400 to $700, a spokesman said. It plays MP3, AAC and eAAC+ music files.

In its study, Yankee said almost 100 percent of smartphones sold in 2006 will support full-track music storage, although smartphones will account for only 7 percent of unit handset sales. Feature phones in the $49-$99 price range "are rapidly incorporating support for full-track audio storage and playback," Yankee added. In 2009, 42 percent of all phones sold in the United States "will offer substantive support for music," Yankee concluded.

In 2005, the installed base of dedicated digital audio players hit 33 million, compared with the installed base of 12.5 million. By 2009, the number of music-phone owners will hit 65.4 million, exceeding the 64.9 million installed base of dedicated music players. In 2010, the installed base of music phones will outnumber dedicated music players by 1.4:1, or 90.9 million, compared with 65.6 million.

For the 2004-2010 period, Yankee forecast a 36.1 percent compound annual growth rate (CAGR) in the installed base of dedicated MP3 players and a 61.3 percent CAGR for the installed base of music phones.

Although many phones will play music, it will be another matter to convince their owners to download music through a cellular carrier’s over-the-air download service,

Yankee noted. Digital audio players (DAPs), Yankee explained, "are a demand-driven market, while music-capable phones are supply-driven. Because consumers make a conscious choice to purchase DAPs, they are more likely to use them. Once consumers begin building a digital music library and using a jukebox to manage their library (on a PC), it will be increasingly difficult for wireless carriers to convince them to change [download] services."

For that reason, carriers and content providers must adopt "cross-platform distribution models" so that content downloaded securely to a PC or to a cellphone can be shared easily between the two devices, Yankee said.

Over-the-air game downloads, on the other hand, will soar during the remainder of the decade, Yankee contends. By 2009, it forecasts $1.9 billion in retail-level sales of game software for dedicated handheld game players, while sales of cellphone-downloaded games will hit $1.1 billion. That compares to 2005’s estimated $897 million in handheld game software sales and $292 million for phone-downloaded games.

Although the current number of cellphone users who actively download games over the air is small, Yankee notes, their numbers will grow more quickly than the number of handheld-game users in coming years. The installed base of active cellphone-game downloaders will grow from a current 4.5 million users to 22.6 million by the end of 2009, closing in on the installed base of 39.5 million dedicated handheld-game players, the company said.

Yankee doesn’t believe the rise of cellphone gaming, however, will threaten sales of dedicated handheld game players or software. "Wireless carriers have carved out a unique niche in the game segment that does not compete with video game consoles, CD-ROM-based PC games or handheld games and is complementary to casual Internet games," Yankee’s report said. "Both casual Internet games and mobile [cellular phone] games are simple to learn and difficult to master and do not require a significant investment in time and money." Fifty-three percent of casual Internet gamers, the study noted, also play cellphone games.

Cellphone gamers are 64 percent female and have a median age of 27. Casual Internet gamers are 50 percent female and have a median age of 36. Console gamers, on the other hand, are only 32 percent female with a media age of 24. CD-ROM gamers are only 34 percent female with a median age of 32.