MP3 players losing muscle

The MP3 player industry – otherwise known as the iPod market – seems about to go from being a rock star to a has-been.

While still strong, sales have slowed and even begun to decline in some markets. Prices, particularly on the low end, are plunging, typically an indicator of slacking demand.

Even the mighty iPod, which revived Apple and once vied with the Mac as the company’s most important product line, has seen a marked decline in sales growth and attention.

The market “has slowed down a bit,” said Ross Rubin, an analyst with market research firm NPD Group. “There’s a strong argument for saturation.”

But the industry faces more than just a shrinking base of new customers. Newer features like video playback and wireless networking have done little to lure old customers to buy new devices. Meanwhile, after years of hype, music-playing cell phones – most notably Apple’s iPhone – are starting to gain traction as iPod replacements.

Rob Enderle, principal analyst with tech consulting firm the Enderle Group, compares the MP3 player market to that for personal digital assistants earlier this decade. Sales for such devices, including Palm’s iconic Pilot, plunged after cell phones and smart-phones started offering the same features.

“I think we’re at the forefront of where we were with the PDA . . . where people say, ‘I can get this on a phone, why do I need a PDA?’ ” he said.

That would be a big change for one of the first big hits this century for the electronics industry.

The MP3 player business got its start in the late 1990s, as consumers who had stored up digital files on their computers looked for a portable way to play them. But it didn’t take off until Apple launched the iPod in 2001.

The device soon became a phenomenon. With sales growing rapidly, the iPod not only boosted a struggling Apple but also shook up the music industry, dragging it kicking and screaming into the Internet age.

By the holiday season of 2005, more than half of Apple’s total revenue was coming from iPod sales, which were growing more than 100 percent annually. Meanwhile, the global market for such devices was more than 100 million units annually, a sizable number for such a relatively new technology.

Then the market changed its tune. Apple’s revenue from iPod sales grew 176 percent in 2005, followed by 31 percent in 2006 and just 8 percent last year.

Apple wasn’t the only one struggling. In the fiscal year that ended March 31, retailers sold 27.2 million portable media players in the United States, down slightly from the 27.3 million they had sold in the same period a year earlier, according to NPD Group.

Although sales haven’t declined globally, they’ve slowed there as well. Annual growth in worldwide MP3 player shipments went from 233 percent in 2005 to 31 percent in 2006 and 19 percent last year, according to Gartner.

One reason for the slowdown, particularly in the United States, is the early sales bonanza, analysts say. As of last year, 56 percent of U.S. households had at least one portable media player, and many had two or more, according to IDC, an industry research group. With fewer consumers without an MP3 player, device makers have tried to persuade prior customers to buy new models.

That’s been a tough sell. Makers have added new features to make their devices more attractive, but those generally haven’t proven popular.

Microsoft, for instance, thought WiFi connectivity would set the Zune apart and spur sales. Instead, the Zune has become a market afterthought. Apple added video to its hard-drive-based iPods in October 2005 and later added it to other models. But over the past year, it’s sold 15 times as many songs as television episodes.

“People were buying iPods for music. The next big thing was video, but video doesn’t seem to be driving sales,” Enderle said.

At the same time, mobile phones have become viable alteratives to buying a new MP3 player. Many phones – not just the iPhone – can play music these days. Using them for that means one less device to carry and also often allows consumers to buy digital music wherever they are – not just when they are connected to a computer.

“When you look at the phones, you’re seeing ones that are not only good replacements for portable media players, but they are in many ways a step above,” said Jon Erensen, a research analyst at Gartner. “They allow you to do things that stand-alone players can’t do.”

Still, few expect the MP3 player market to disappear anytime soon. Device makers will likely continue to sell millions of players for some time to come.

The devices – particularly the less expensive ones – are starting to catch on in developing countries, said Susan Kevorkian, an analyst with data group IDC. And while many consumers in the United States and other developed countries are likely to switch over to music playing phones, some will continue to want a stand-alone music player, she and other analysts say.

MP3 players likely will continue to offer greater storage capacity than phones. And they typically don’t come with a monthly contract.

“There’s still potential in the market,” Kevorkian said.

In other words, the music may be slowing down, but it hasn’t died.