Get Ready for Apple's Incredible New...MP3 Player?

Known for its dramatic product launches, Apple tantalized analysts last week when it revealed that a new "digital device" was coming. True to form, Apple wasn't revealing any details, except that the new product wasn't another Mac (thankfully). Of course, Apple product announcements can't be expected to grab headlines like they used to; there are far more pressing issues on the national agenda these days. Maybe that's why the launch wasn't made at a Macworld event — where new products are typically unveiled — or even Webcast live.

At any rate, on Tuesday, Apple took the wraps off the latest additions to its product portfolio: iPod, an MP3 player, and iTunes 2, an updated version of its digital-music software. The new 6.5-ounce iPod device (suggested retail price: $399) can store up to 1,000 CD-quality songs and has a built-in FireWire port for speedy downloading. The latest generation of its digital-music software features MP3 CD burning, an equalizer (to customize audio settings) and cross fading (to create more graceful transitions between songs).

A big yawner, you say? Perhaps. After all, there are plenty of MP3 players out there. (Compaq Computer (CPQ), for example, offers one for $149.99 on its Web site.) But while Apple's latest debut might not score high on the significance meter — particularly according to Wall Street analysts hoping for a splashier announcement — it does offer a glimpse into the tactics computer makers are beginning to employ as demand for their core products wanes.

They certainly need to do something. Third-quarter PC shipments plunged 11.6% from a year ago to 30.7 million units, according to Gartner Dataquest. Only Dell Computer (DELL), the industry's most aggressive price cutter, managed to post unit growth (10.8%) during the quarter. With such lackluster results, box makers are desperate for ways to spark interest for their products.

They've tried a couple of different approaches. One is to sell peripheral products like printers, scanners, cables or software that can connect to and enhance the PC. Whether it's online or through retail outlets — such as Gateway's (GTW) Country Stores or Apple's retail centers — companies are trying to be one-stop shops where people can buy a host of products. Maybe they're only moving mouses and monitors, but at least that's something.

Another approach is — gasp — to identify new markets and create products for them. Critics charge there's been very little innovation on the part of PC makers of late, that they're adept at cutting prices or jamming faster processors into boxes but little else. But some PC makers are trying to offer buyers new things to do with their computers by including consumer-friendly features like CD read/write drives, DVD players or flat-panel displays with their systems. Compaq, for one, has moved into digital-music devices and personal digital assistants.

Apple's foray into MP3 players is the company's next step in this progression. The home-entertainment business Apple is aiming for will be the "it" market of the future, explains Stephen Baker of market-research firm NPD Intelect. As home entertainment becomes more digital, computer and consumer-electronics technologies will converge even more, so that, say, televisions, camcorders and stereos can connect seamlessly with one another and, when appropriate, through a PC. Sony (SNE) boasts the best product portfolio in this regard, having both strong consumer-electronics gadgets and sleek PCs. With consumer-electronics sales holding up much better than PC sales, it only stands to reason that computer makers would want to bring their brand names to this market as well.

That isn't to say it will be easy to do. "One of the biggest issues for PC makers going into the consumer-electronics [business] is that the economics are different," says Baker. These products tend to carry better margins, true. But they also tend to have longer life cycles than PCs, and their sales volumes aren't as high. And the precise shape of the digital future is anything but certain. There are a variety of ways to go about creating a digital hub for the home. Companies are going to have to take on the task — and expense — of explaining these products before they'll gain acceptance.

Not all companies are going about the task in the same way. Sony has the computer-and-consumer-electronics combo down pat, it would seem. From branded camcorders to digital cameras to digital-music players, this is a company that knows consumer electronics and how to marry them with PCs. Compaq has also dabbled in consumer gadgets, but to a lesser extent. (Its iPaq line of gadgets includes personal music players, a digital home-audio center, home-networking devices and a PDA.) But aside from these, the big-name PC offerings on this front are pretty weak. Gateway offers various software packages for digital photography, music and videos, and sells accessories like digital cameras, camcorders and speakers — but they're primarily non-Gateway brands. Ditto for Dell.

PC makers lately have focused almost exclusively on price cutting as a way to grab market share. That's fine for now, but in the near future, they'll have to freshen up their product lines to stir up some genuine consumer interest. Sony, Compaq and now Apple have started along this path. You can bet the others will join in soon enough.