Supply Chain Vision: MP3 Players, a vision realized - and then some

Market to expand to 230.8 million units by 2009

Back in 1993, I attended an investor conference that included a little-known company called SunDisk, now the well- known SanDisk Inc. The company's founder, Eli Harari, predicted a booming future market for flash memory devices, including portable music players.

It may have taken a little longer than he predicted, but Dr. Harari definitely was right: The market for MP3 and Portable Media Players (PMPs) is certainly booming. And that may be an understatement.

Factory shipments of these players last year grew even more than initially anticipated. Shipments grew by a staggering rate of nearly 250 percent to reach 128.7 million units in 2005, up from 37 million units in 2004, according to iSuppli Corp.

Powered by inexpensive chips from China-based Actions Semiconductor Co. Ltd., sales of low-end flash-based players in 2005 were especially strong, particularly in Asia. But even at the other end of the market, Apple Computer Inc. surprised many by shipping 4.6 million video-enabled iPods during the fourth quarter.

Household penetration is still relatively low for MP3 players and some consumers will own more than one player. For these and other reasons, strong growth will propel the market to 230.8 million players by 2009.

Figure 1:  Worldwide MP3 and Portable Media Player Shipment Forecast (Millions of Units)

Source : iSuppli Corp. | February
 
Apple continues to dominate the market for MP3 players. During 2005, the company strengthened its position by introducing the flash-based iPod nano. Apple also scored by adding video capability to its flagship iPod while simultaneously cutting deals to include video content on its iTunes online music store. To date, consumers have downloaded more than 12 million videos from iTunes.

The company more recently introduced a 1Gbyte version of the iPod nano and cut prices for the iPod shuffle; these moves expand Apple's footprint in the market.

One key challenge that Apple faces is iTunes' contract renewal with record labels, some of which are expressing an interest in variable pricing, i.e., making consumers pay larger fees to buy the more popular songs. Apple is resisting this move, and user studies certainly suggest that consumers likely would respond to any price increases by reverting to more piracy.

A lesser challenge is the availability of new music download services from Verizon and Sprint. However, it seems unlikely that consumers will embrace paying a two-to-three times premium-exclusive on any additional air-time charges-compared to iTunes, just for so-called convenience and instant gratification.

Many hardware companies also are trying with limited success to challenge Apple's leadership. However, these competitors face several challenges ranging from flash-memory supply, to content availability, to the so-called "coolness factor."

One company that has achieved growth is the firm whose founder envisioned this market: SanDisk.

Perhaps best known as a memory card supplier, SanDisk is a seller of MP3 players as well. The company increased its MP3 revenues from accounting for just 1 percent of revenues in 2004 to 6 percent in 2005. SanDisk quadrupled shipments between the third and fourth quarters and achieved the number-two market-share position in the United States.

So how has SanDisk managed to grow while many other MP3 makers have faltered?

The company has two key advantages. First, it can supply its own flash memory. This capability is important because Apple has signed a long-term deal to secure a significant portion of NAND flash memory output over the next several years.

Second, SanDisk has strong retail distribution, which it gained from years of selling removable flash memory cards for digital still cameras and other consumer electronics products. More recently, SanDisk took a cue from Apple and began sourcing the controller for its new flagship Sansa e200 players from PortalPlayer Inc.

PortalPlayer itself continues to succeed because of its strong relationship with Apple, which accounted for about 95 percent of its 2005 revenue of $225 million, up 143 percent from 2004.

However, PortalPlayer is seeking to diversify both its customer base and its product portfolio. Besides SanDisk, the company recently has also scored notable design wins with Philips and Sirius.

PortalPlayer also has announced partnerships with two wireless technology companies: Cambridge Silicon Radio plc and Icera Inc. Those deals likely will result in the introduction of Wi-Fi and Bluetooth-capable chips during 2006. That move could enable partner Apple to introduce a wireless-enabled iPod that would not require it to rely on potentially troublesome mobile telephony carriers.

PortalPlayer also undoubtedly is working diligently to add video decoding functionality into its controllers. The current flagship iPod relies on a Broadcom Corp. chip for video, and PortalPlayer likely is eager to win that socket as well.

On the other end of the market from PortalPlayer is Actions Semiconductor. The Chinese supplier had a very strong 2005 and shipped slightly less than 50 million controllers. Actions serves the low end of the MP3 player market, and its products have Average Selling Prices (ASPs) in the $3 range.

The growth of Actions has placed added pressure on SigmaTel Inc., which is finding itself increasingly squeezed between PortalPlayer at the high end and Actions at the low end. Nevertheless, SigmaTel is fighting back with two new chips.

The first chip is the long-delayed 36xx, which marks the company's shift from a DSP-based architecture to an ARM Holdings plc microprocessor-based architecture. Since this change requires new operating system software, securing design wins could take some time.

The 36xx is also a higher-end chip, and there may be limited customers, given Apple's dominance and its reliance on PortalPlayer. SigmaTel's other new chip is an FM tuner, which could generate more than $10 million in revenue this year and strengthen the company's position by enabling SigmaTel to bundle the tuner with its controllers.

After 13 years, the exciting market for flash memory envisioned by SanDisk's Dr. Harari is here, providing copious opportunities for semiconductor and equipment companies shrewd enough to take advantage.

Chris Crotty is senior analyst, consumer electronics with iSuppli Corp. Contact him at ccrotty@isuppli.com

To read more about current and future developments in this exciting market, read Crotty's upcoming report: Consumer Platforms Topical Report- Q1 2006: MP3 Players.