How The Grinch Stole Mp3

The much-hyped digital-audio format is stymied--again

Just a few months ago, it looked as though portable MP3 players--Walkman-like boxes that let you play back digital music through headphones--would be the big gadget at Christmas. Well, maybe next Christmas.

This year, MP3--the name refers to a digital-recording format--looks like it will remain what it has been: a way for techno-savvy teens and college students to get music off the Net and reorganize the material from CDs as music files on their computers. Only three major companies are even marketing the MP3 players, which sell for $99 to $269. Even with the combined yearend rush of players from Samsung and other South Korean manufacturers, sales this year are likely to total 600,000 to 800,000 units, far short of the 1 million target that Forrester Research Inc. expected in March. "The hype has been pretty thick," says Larry Kenswil, president of electronic commerce and advanced technology at Universal Music Group.

BIG FIZZLE. What sidetracked MP3? A significant obstacle was that major record companies and equipment makers couldn't agree on how to thwart piracy. This problem was supposed to be solved last summer. But the music companies and the hardware makers didn't ratify standard techniques to identify legitimate music files until Nov. 12, too late to be incorporated into players this year. And the record companies are still searching for a sound business model for delivering music online and collecting money for what has up till now been available for free.

Even now, disputes are simmering about how to handle music that is scheduled to be released online next year. Those spats likely won't be settled until mid-2000, says Leonardo Chiariglione, executive director of the Secure Digital Music Initiative, an industry consortium. As a result, the five big record labels that control about 85% of the $12 billion U.S. market are holding back on distributing music digitally.

MP3 equipment makers are anxious too. For the three major companies selling the portable players--Diamond Multimedia, Creative Labs, and Thomson Consumer Electronics/RCA--the expected MP3 boom has been a big fizzle. The device looks like a miniature Walkman, but instead of playing disks or tapes, it stores music that's piped from the hard drive of a PC through a cable. Since they store those files on chips, instead of spinning disks, they can run for hours on a small battery.

RCA's Lyra, which plays music files not only in the MP3 format but also the G2 format from RealNetworks Inc., stores up to two hours of near-CD-quality music on a slim card full of so-called flash-memory chips. Flash, unlike conventional memory, keeps information even when the power is off. But the flash technology itself has been a bottleneck: Since the earthquake in Taiwan, MP3 manufacturers have had trouble getting supplies.

That's not the only woe the industry faces. Most grownups don't like to mess with the software for transferring and organizing audio files. There are also fears of obsolescence: The MP3 players on the shelves today may not play music major labels release next year. That's because next year's tracks may well be encoded with special software, known as watermarks, to hold pirates at bay.

RISING TIDE. The biggest hurdle, however, is a lack of good tunes. Many music wannabes have posted original songs on the Web. But a crackdown by the Recording Industry Association of America has made it harder to find sites offering pirated versions of top acts. Meanwhile, the major labels have just been dabbling with digital downloads. "To have a real marketplace we need portable players, and the current generation aren't secure," says Kenswil.

Still, the labels can't fight the tide forever. Before Christmas, Universal, EMI, and other major labels will probably announce technology and e-commerce partners to permit limited downloads. Analysts predict that they will forgo current MP3 formats and move to more powerful compression schemes from Microsoft Corp., AT&T, and others. These will allow third-generation devices to record twice as much music as earlier ones while selling at a fraction of current prices. The new players will also be set to detect pirated music sent in the new formats.

Perhaps the best sign of the MP3 format's long-term prospects, however, is the imminent arrival of major Japanese hardware makers. Early next year, for instance, Sony Corp. plans to sell a portable player that resembles an oversized silvery pen. It has a tiny screen and a port that connects to a PC. Cell phones, palm devices, car stereos, and set-top boxes also will begin to function as digital music players. That could make Christmas 2001 merry indeed.

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