Music phones to slice into iPod growth

By Nathan Layne

HONG KONG (Reuters) - Perhaps the biggest threat to Apple Computer Inc.'s (AAPL.O: Quote, Profile, Research, Stock Buzz) iPod and the portable music player industry is a device already nestling in a billion pockets: the mobile phone.

Sales of cellphones that can store and play back music are climbing, raising hopes among handset producers like Sony Ericsson (6758.T: Quote, Profile, Research, Stock Buzz) (ERICb.ST: Quote, Profile, Research, Stock Buzz) and Motorola Inc. (MOT.N: Quote, Profile, Research, Stock Buzz) that it will be their next growth driver.

Music phones may never kill off the market for the stand-alone music players of Apple, Sony, Samsung Electronics Co. Ltd. (005930.KS: Quote, Profile, Research, Stock Buzz), Reigncom Ltd. (060570.KQ: Quote, Profile, Research, Stock Buzz) and others, but they could dent the market's potential.

"You have the ability to talk, take pictures and listen to music in one device. The convenience factor is big," said Simon Leung, senior vice president of Motorola Asia, at the Reuters Global Technology, Media and Telecoms Summit in Hong Kong.

Simpler music devices with flash memory chips that store up to a thousand songs are the most vulnerable, analysts say.

"The music phone is not going to significantly impact the high-end, high-capacity hard disk market but it will certainly have a major impact on the low-end flash market," said Peter King of Strategy Analytics.

King estimates sales of phones equipped with MP3 music players will balloon to 796 million in 2010, accounting for three-quarters of all handsets sold, from 94 million this year.

Over the same period, the market for stand-alone digital music players, should triple to 176 million units from 58 million, which while still strong, would be slower than the break-neck expansion of recent years.

In the search for historical clues, analysts look to the introduction in 2000 of the camera-equipped mobile phone. This cut demand for cheaper digital cameras, but did not have a huge impact on the industry overall.

However, industry watchers say adding digital music to handsets will cause a much bigger ripple than photos did, because quality is less of an issue. Many people use their music players while traveling or exercising -- where background noise reduces the importance of high-quality sound.

Some consumers might hesitate to spend $249 on a 4-gigabyte flash-based iPod nano, when they could pay an extra $100 to $200 for a new Sony Ericsson Walkman phone with the same music capacity built in. That handset will be launched later this year.

Claudio Checchia of research firm IDC Asia Pacific, believes the impact could be greatest in Asia.

"In Asia, there is a huge status symbol with the mobile phone where folks don't really think twice about spending $500 or $600 to buy the latest mobile phone but are not willing to spend $200 or $300 for an MP3 player," he said.

Apple controls 55 percent of the global MP3 player market and has a 70 percent U.S. market share. It also reaps profits from the millions of songs sold through its iTunes online music store.

But its battle with the cellphone threat continues.  Continued...