Creative’s Zen portable media players (PMPs) allowed users to store videos long before Apple’s video iPod hit shelves, came in many colors—and, more important, worked with a variety of online content sellers. Yet Piper Jaffray analyst Gene Munster recalls a Zen user looking over iPod accessories, of all things, in a Skymall catalog.

No wonder Apple still has about 25 percent of the global market for digital PMPs, according to In-Stat industry analyst Stephanie Ethier. (Singapore-based Creative is No. 2 at about 6 percent.) In the United States, it holds more than 70 percent. “The power of the iPod is that people think it’s an investment,” says Mr. Munster. “You can use it in different ways with things from the iPod ecosystem.”

The ecosystem may be in danger of a washout, the latest chorus of iPod challengers might say. Flash-memory maker SanDisk launched its Sansa not two years ago and it’s already the No. 2 seller in the U.S. Longtime Apple rival Microsoft promises its Zune player by year’s end.

‘You hear about a new supposed ‘iPod killer’ almost every week.’
-Stephanie Ethier, In-Stat

Gartner analyst Jon Erensen predicts the global portable audio player market will grow to nearly 300 million units in 2010, well up from 40 million in 2004. While the U.S. is the largest market for players, JupiterResearch notes that 25 percent of European households will end up owning one this year, up from 11 percent in 2004. And In-Stat reports the number of “true, video-centric PMPs”—devices with screens of at least 3 inches wide—will grow to 5 million worldwide in 2006, up from 390,000 in 2004.

Content Is King
“You hear about a new supposed ‘iPod killer’ almost every week,” says Ms. Ethier, admitting annoyance at the term.

But rivals are looking more credible. For competitors, the missing piece has been easy integration of gadget and content. By contrast, the relationship between iTunes and iPods isn’t just convenient, it’s symbiotic.

Only players with software to decode Apple’s FairPlay digital rights management (DRM) can handle iTunes downloads. But technology is moving beyond Apple’s confining version of cool. Startups like Mountain View, California-based Zing and South Korea’s INKA Entworks, among others, have worked out ways to smooth content-device integration.

The iTunes software launched in 2001, when it worked only on Macs. Apple next hired PortalPlayer to help build a portable device based on one in its catalog—asking the chipmaker to give up its other clients, including IBM, while it worked on the iPod. The iTunes Online Music Store kicked off in 2003, the same year iTunes software was made PC-compatible.

Apple kept pushing the iPod ahead, extending battery life, scaling it down, and introducing flash memory and video. But most of all, it finessed the package: iPod + iTunes = iMonopoly. And critics, many of them government and industry officials from Europe, complained increasingly louder about Apple’s closed system.

Challengers have also focused on improvements. In July, New York City-based online content startup Music Gremlin put out a player—its first—that allows users to download songs over Wi-Fi, something the iPod can’t do. Besides buying songs wirelessly at a moment’s notice, users can also share songs with fellow Gremlin owners. Gremlin co-CEO Robert Khedouri claims the devices can even “talk” to each other about their owners’ listening preferences. He hopes to create a “community” of Gremlin owners that could displace the iPod’s pop culture status.

“What we’re trying to do is change the game,” Mr. Khedouri says, adding that other manufacturers can license the Gremlin’s Wi-Fi technology. “In a year’s time,” he declares, “there will be two categories—players with connectivity and players without.”

Some companies are focusing on software that best pairs content and device. There’s Zing, formed in early 2005 by CEO Tim Bucher, a former senior vice president of engineering at Apple who managed iPod core technology groups. Zing has a content access platform designed to sit inside different devices, making music buying effortless from music stores like Rhapsody, Yahoo, and Napster. To the user, it will seem like the device has its own wireless version of iTunes.

Mr. Bucher declines to name most clients, except to acknowledge that his company has been working with Sirius Satellite Radio on a Wi-Fi-enabled satellite radio—and a possible PMP device. “We’re focused on providing a new generation of always-connected, multi-functional entertainment players,” he says, “completely mobile and untethered.”

Integration between gadget makers and content sellers is already working in South Korea, to hear INKA Networks CEO James Ahn tell it. Indeed, his software can tease songs out of eight different DRM protocols, enabling INKA-powered devices to download files from any South Korean content provider. So far, Mr. Ahn says, 90 percent of content providers and 70 percent of player makers in South Korea are working with his company. With plans to expand across Asia and Europe this year, Mr. Ahn says, “If people feel interoperability is more valuable than iPods’ and iTunes’ closed service, they will move into these devices.”

Going it Alone
SanDisk has made headway without a specific integrated content provider. Its Sansa player, which launched 18 months ago, packs up to 8 GB of audio and video storage into a Nano-sized player. Sansa has grabbed up to 17 percent market share in the U.S., pushing Creative to No. 3 there, according to Current Analysis analyst Samir Bhavnani. One reason could be price: because SanDisk makes its own flash memory, it’s been able to keep player prices down.

“We’re clearly going after the sweet spot of the market,” SanDisk executive vice president Nelson Chan says. The company just started shipping to Asia—and to Europe, where antitrust sentiment over the iPod is nicely rife. “What we always espouse is choice,” Mr. Chan says, hinting that SanDisk may not create online content services branded with its name.

Of course, there has long been speculation that Apple will enable iPods with Wi-Fi or cellular connectivity. “The race gets close, the gap closes, and then Apple jumps forward again,” Piper Jaffray’s Mr. Munster says. “I think Music Gremlin is on to something, but they’re a small company with a good idea that will probably get run over by Apple or Microsoft,” he says. Indeed, with Microsoft’s Zune player coming by year’s end, Mr. Munster sees the digital music battle evolving into a competition between the Apple and Microsoft formats.

Although Sony Electronics’ PMPs have been soundly beaten, Sony Ericsson has made a killing on its Walkman phones. The handsets, which started shipping globally in August 2005, have sold 10 million units, says Sony Ericsson Vice President of Corporate Communications Cherie Gary—generating 25 percent of company sales.

“Over-the-air downloading is part of our strategy. We’re doing it now in Europe,” Ms. Gary says, though U.S. networks aren’t yet equipped to do so. Many industry folks expect Apple to eventually launch an iPod phone, and that may dent the Walkman phone’s sales. But Ms. Gary notes, “It’s a whole lot easier putting an MP3 player into a phone than it is putting a phone into an MP3 player!”

Apple hasn’t neglected the handsets—it partnered with Motorola to get iTunes onto mobile phones—but it still can’t overcome cellular providers’ distaste for offering wireless iTunes at the expense of their own downloads. So users have to connect the phone to a computer to download music. Meanwhile, analysts and other experts say handsets will never kill the need for dedicated music devices. After all, people with photographic phones still own cameras.

Rather than wait to see if Apple cracks the cellular market, challengers are waging a full-scale attack. Microsoft plans to launch its Zune commercial during the Super Bowl, America’s football classic. SanDisk burst out early, launching its “iDon’t” campaign this summer. The crusade pictured animals such as the iSheep wearing white earbuds, accompanied by slogans such as “the walking iDead.”

But whether the iPod or its most promising rivals will die first remains debatable.

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