D&M foresees a short-term delay in shipping MP3 players originally scheduled for the October through January period, now that it has sold engineering assets and intellectual property (IP) to chipmaker SigmaTel, said Bernie Sepaniak, president of the D&M division that includes Rio.
“It has a short-term impact on our product plans,” he said. “It might create disruptions in our schedule, but we can implement the entire product roadmap.” He didn’t get more specific.
Meantime, Rio continues to build and ship its current-generation products.
D&M sold off the assets to reduce the money-losing brand’s losses, but it’s also “examining additional strategic options for Rio,” the company said. Sepaniak declined to comment on potential options, but he did note that soon after the 2003 purchase of SONICblue’s ReplayTV and Rio business units, the MP3 market “developed quickly into a high-volume, scale-based, capital-intensive business with no premium niche.” In contrast, the rest of D&M’s brands, all in the home entertainment market, are “premium-position, higher-average-gross-margin” brands with “significant value adds,” he noted.
Sepaniak attributed the shipment delays to a requirement in the sale agreement that Rio use SigmaTel silicon in all new portables if it wants to use its sold-off IP on a no-fee basis. A minority of the SKUs in the next-generation line didn’t incorporate SigmaTel silicon, and their software must now be modified to run on SigmaTel’s chips, he said.
The sold-off IP involved “importing low-level firmware to chipsets,” a function that few MP3 makers other than Rio undertake, he noted. SigmaTel, he noted, “outsourced a lot of this before.” The IP came with Rio’s Cambridge, U.K., engineering staff and select engineers in Santa Clara, Calif.
Rio is undertaking a cost-cutting effort because “100 percent of the market is a mass-market, high-volume business,” Sepaniak said. “In the end, the only ones who will stay in the [MP3] business are the ones who made that [the mass market] their business.”
Adding to MP3 suppliers’ margin pressures are Apple’s dominance, he added. “iPods are priced higher [than other brands] because of their dominant position and captive iTunes site,” he said. “The rest have to discount.” Despite the discounting by other brands, dealer margins on iPods are still lower than other-brand margins, he noted.
In the MP3 market, if you’re not Apple, “a good place to be” is a service provider or internal-component manufacturer, he said.
Although Rio lost money for D&M, Rio sold 800,000 to 1 million units for the 12 months ending July, the company said. HDD models accounted for about 45 percent, while more than a third were 256MB flash-memory models.