For power players in the consumer electronics market, digital downloads have changed everything.
Not so long ago sales were stagnant, and the potential of digital technology was mired in doubt as illegal downloads of music ran rampant.
But the success of the iPod has changed the game. It's not only that technology and hardware marketers are rushing to meet consumer demand for digital music products, but also that those digital music players have become a marketing tool-a for computer and electronic companies to lure new customers to their portfolios of products.
The hot-selling item for this holiday season will be hand-held digital music players, now driving a resurgence in consumer electronics sales. Also helped by improved sales of high-definition TVs, videogame consoles and in-car entertainment systems, industry sales are expected to hit a high of $108 billion this year, according to the Consumer Electronics Association.
"The promise of digital technology-getting your entertainment where you want it, when you want it and how you want it-has finally arrived, and everyone wants to get in on it," says Jeff Joseph, VP-communications at the CEA.
A major turning point came last year when the runaway success of Apple Computer's iTunes Music Store proved that consumers were happy to pay for songs downloaded to their computers and digital music players if the price was reasonable and the technology worked.
Apple is now selling 16 million songs per month at 99? each. Apple claims 70% of legal music downloads, as well as about half of the U.S. market for hand-held music players, thanks to its popular iPod device.
Its leadership is under attack, however, as competitors multiply. Major online music purveyors now include RealNetworks' Rhapsody, Roxio's Napster, Wal-Mart Stores, Sony Corp. and Microsoft Corp., whose MSN Music offering was unveiled last month.
Industry observers expect the market for legitimate digital music downloads to increase by more than 170% over the coming year.
Microsoft's music service offers songs playable on 70 different types of devices. Apple's iPod plays only music downloadable from the iTunes site, a detail that may eventually create major challenges for the company.
Sales of portable music devices are booming, with a 90% increase to 5.7 million units expected in 2004, says the CEA. Makers of all types of computers and chips, including IBM Corp. and Intel Corp., are getting into the game through development of platforms supporting the growth of digital entertainment
Hewlett-Packard Co., riding high on strong sales of its digital cameras and printers for consumers, didn't want to miss out on the portable music revolution. HP got into the marketplace quickly by partnering with Apple to produce its own version called the Apple iPod From HP.
Although it looks and functions exactly like Apple's iPod, HP is differentiating its version by offering customizable, printable covers for the devices. It's also pushing the product through broad, PC-oriented retail channels where it has strong market share, including Best Buy Co., CompUSA, RadioShack and Costco.
"Our goal is to get you the content you want-music, movies, TV shows, games and photos-on the digital device of your choice," says Allison Johnson, senior VP-corporate marketing at HP and a 2004 Power Player.
In its advertising, HP is also promoting easy interoperability of all its consumer-targeted devices, which is expected to help grease sales of its iPod.
"Making things easy is, of course, really hard," says Ms. Johnson.
The future of digital entertainment is expected to go well beyond music. Microsoft executives have said MSN Music is less a profit driver than a magnet for its overall MSN offerings that will become increasingly enriched by digital technology.
Its new services include MSN Music Radio, which provides ad-supported radio programming based on actual local radio stations. (For $30 a year, subscribers can get it minus advertising.) Next up: A Microsoft portable video player with manufacturing partners Samsung and Creative Technology. The hand-held device will allow consumers to play TV shows and video, as well as music.
Analysts say it's premature to gauge demand for a portable video device, but market research has shown strong consumer interest. The CEA's Mr. Joseph notes: "So far, the rule has been if you build a better mousetrap, consumers will come."