ALL: WEBNOIZE ON EDIG
January 17, 2000
profile . industry . companies .
consumer-electronics . technology


Waiting Game: E.Digital and the Portable
Player Market

A year from now, a portable digital music
player could be part of standard computer
packages sold through retail outlets. Further,
marketing gurus are predicting that give-away
"designer" digital music players could
become the next great marketing vehicle for
online music promotion and consumer goods
brand-building.

San Diego-based e.Digital Corp. is
positioned to become a leading developer of
the back-end architecture of such players,
potentially generating profits by proliferating a
sophisticated design without the risk or
overhead of manufacturing, distribution and
direct-to-consumer marketing of such devices.

The company counts among its most
prospective clients computer manufacturers
looking to offer portable players as soon as
possible, and is in the midst of signing
licensees. Currently, its single development
deal is with Maycom Co. Ltd., the Korean
manufacturer of the I-Jam MP3 player, the
device used by Bill Gates on a recent press
run to show off the Windows Media format.
Maycom hopes to begin manufacturing by
summer of this year a third generation of its
player that supports multiple codecs and
digital rights management formats through
e.Digital technology [see 1.5.00 MP3 Player
Maker Licenses E.Digital Design].

"The real benefit we bring to the table is time
to market," says e.Digital CEO Fred Falk.
"We already have a completed design. A
company starting from scratch will take at
least a year to design and bring a player to
market."

The strategy has worked for the company in
the past. Sanyo approached e.Digital in 1994
while in the midst of developing a digital voice
recorder, before realizing the task was going
to take longer than expected. Licensing a
stop-gap design from e.Digital bought Sanyo
an early place in that market, with time to
develop a recorder of its own.

"Some of the companies we're working with
certainly have the capability of developing the
products themselves but they want to get into
the market sooner, as opposed to later, and
they're realizing that it isn't a slam dunk to
develop these things," Falk says.

Thus, e.Digital has no plans to market its own
branded player; its plan is to provide the
design of a top-quality product to partners with
established marketing and distribution
infrastructures. After all, according to Falk,
profit margins licensing to OEMs are a bit
better than if e.Digital were to try its own hand
at distributing and marketing a player,
because of the high costs and commitment
associated with branding and earning a
reputation among consumers.

Native Tongue. If e.Digital's portable player
platform is all the company says it is, then
compared to available devices, it's a monster.
The company touts as a major feature of the
device its ability to download and decode
audio encoded in several different formats,
including MP3, but also Advanced Audio
Codec (AAC), Audible, Liquid Audio, Lucent's
EPAC, Microsoft's WMF, Apple's QuickTime,
RealNetworks' RealAudio, Twin VQ and
others.

In addition to its ability to recognize digital
rights management formats for music from
InterTrust, Liquid Audio and IBM, the beauty of
e.Digital's design is the ease with which it can
be modified.

"You can put a different wrapper around the
core design of this thing, to make it look any
way you want," says Falk. "Companies are
going to differentiate their players through
their looks and features. Some will have the
ability to do voice recording, some will have
an FM radio, some might even want a
stopwatch."

That's important because e.Digital needs to
be able to license its design to competing
companies.

Waiting game. If its player is so hot, what is
e.Digital waiting for? In addition to three
existing products -- Diamond Multimedia's
popular Rio, Creative Labs' Nomad, and
Thomson Multimedia's RCA Lyra -- at least 20
similar digital MP3 players were to hit the
market by the 1999 holiday season, most
notably Sony's new MP3-enabled Walkman.

But those haven't arrived because like many
entities planning to market a player, e.Digital
is waiting for industry-approved anti-piracy
technology to become available. While the
company's strategy is to provide CE and
computer manufacturers quick access to the
burgeoning market for music players, the
company doesn't want its partners to rush
products onto shelves that could be obsolete
once the Secure Digital Music Initiative
(SDMI) determines how an approved
two-phase security system for portables will
work.

SDMI is a collaborative project joining about
140 music and technology companies to
determine technical specifications and
functionality of digital music files, devices and
software. The initiative plans to enact security
systems in portable devices in two phases.

In its first phase, a device using the SDMI
platform can play music encoded in a
protected or unprotected format. However, to
play much of the commercial digital music of
the future, a user will have to upgrade an
SDMI-managed device to "Phase II."

SDMI has determined functionality
specifications for a Phase II "screen" that
detects illegally reproduced music, but the
technology doesn't yet exist in any approved
form. SDMI has issued an official Call for
Proposals, inviting vendor proposals for
Phase II technology.

SDMI's slower-than-expected progress
translates into an awkward period for
e.Digital; while the company waits, potential
licensees have time to develop players of their
own.

"There's uncertainty related to what format
content will be in once it becomes available,"
says Falk. "We've made the decision to not
just put another MP3 player out there, but
instead to hang tight until the real content
comes."

Company Vice President Robert Putnam
goes as far as to say that waiting for SDMI
progress has made the multi-format
compatibility of e.Digital's audio platform even
more necessary to the developing market.

"Prospective e.Digital licensees aren't going
anywhere else to bring out MP3 players
because they don't want to be a 'me too'
product -- they want to support real content
when it becomes available," Putnam says.

"This delay has probably helped us more than
if things had standardized quickly. Then the
big guys would have come out with their stuff
and steamrolled everybody."

In the meantime, e.Digital is negotiating with
as many prospective OEMs as possible to
close deals like the one with Maycom. Falk
says most of its prospects are
well-recognized names in consumer
electronics and home computing interested in
licensing either e.Digital's core design or
some modification.

Fortunately for e.Digital, its portable music
initiative is not its only business bet. The
company can barely be called a start-up,
existing since 1988 as developer of a
technology that put all of the functionality of a
telephone into a single earpiece. The
innovation was sold off to a Wall Street firm in
1992, and company founder Woody Norris
looked down the road toward what he thought
might be the next emerging technology. He
identified non-mechanical media -- flash
memory -- in 1993. A year later Norris had
developed a prototype voice recorder, and by
1995, e.Digital's first product, and the first
voice recorder that interfaced with a PC.
Sanyo licensed Flashback.

Today, the company is funded by sale of
publicly traded over-the-counter bulletin board
stock (its market cap is listed as $920
million), and earns revenue from an ongoing
partnership with Lanier Worldwide, Inc., which
distributes a voice recorder engineered and
manufactured by e.Digital. Last March,
e.Digital finished its fiscal year generating
about $500,000 from Lanier, and in about 90
days expects to have quadrupled that amount,
when its current fiscal year winds to a close.

In June, the company closed its only financing
from an institutional investor, $3 million from
JNC Opportunity Fund, Ltd. [see 6.29.99
Portable Device Maker e.Digital Receives
$3M Investment].

Falk predicts that in 2000 e.Digital will collect
over $7 million from products shipped to
Lanier alone. "Whatever deals we end up
closing on the music side will just add to that,"
he says.

Bigger Business. Depending on how many
music deals e.Digital can close, its portable
audio player business could become bigger
than its voice recorder business. Royalties
could range anywhere from $4 to $8 on a 64
MB player (enough internal memory to hold
about an hour of music, the standard among
companies currently shipping players), priced
between $240 and $260.

In November, the company settled on its
designated Internet audio group, which
includes engineer Atul Anandpura (who
designed Maycom's I-Jam) as vice president
of research & development. The group is
developing further the e.Digital audio
architecture, as well as MicroOS, its patented
flash memory management system.

MicroOS could prove to be e.Digital's most
lucrative asset. The tiny (8K) piece of code is
the only file management system for flash
memory that doesn't come encumbered with
proprietary hardware that adds cost and eats
battery life. Its purpose, efficiency, and an
e.Digital patent covering MicroOS could make
it the management backbone of millions of
portable devices over the next few years -- not
just music devices, but anything requiring flash
memory management. The company also
holds a patent covering methods for recording
and retrieving voice messages on flash
memory in hand-held digital recorders.

E.Digital's stock has received attention
following a recent burst of vitality, its shares
steadily climbing since late December
following rumors of secured licensing deals.
Currently hovering around $7 after a recent
spate of announcements saw the stock rocket
up to $10 per share, ticker symbol EDIG is
preparing to make the move from bulletin
board trading to the Nasdaq market.

Through its design, OEM deals and even
manufacturing capabilities of its own through
partners in Malaysia, e.Digital could be the
company to make portable digital audio
players more ubiquitous than portable
cassette or CD players have ever been. In
addition to playing a potentially significant role
in keeping advanced devices on store
shelves, the company could be instrumental in
making portable audio a standard part of PC
packages.

"We're an engineering company. What we do
is let companies with the right resources
provide unique technology and products
themselves," Falk says.

In the meantime, Falk and e.Digital wait for the
Big Five to open their respective vaults to
digital distribution, before closing licensing
deals in earnest.