Death bells ring for Rio

[Jeremy Charette]

<div class='os_post_top_link'><a href='http://engadget.com/entry/1234000663052036/' target='_blank'>http://engadget.com/entry/1234000663052036/</a><br /><br /></div><i>"You may remember SigmaTel, they’re the company who makes, among other things, the chipsets for Apple’s iPod shuffle. Yeah, those guys. Well, guess those flash-memory and integrated-circuits lined pockets just scooped up our favorite underdog digital audio player company: Rio Audio (aka Digital Networks)."</i><br /><br />Nothing has been officially announced yet, but it looks like Rio is going under. It's a shame, since it seems like they were one of two real competitors to Apple and it's iPod lineup (the other being Creative Labs). The iPod just continues to steamroll the competition. Could Microsoft be the <a href="http://www.forbes.com/work/feeds/ap/2005/05/12/ap2022464.html">dark horse</a> in this race?

[Jason Dunn]

So the speculation is that they bought Rio just to kill them? Possible, but seems odd to me... :?

[klinux]

Yeah, does not pass the smell test to me either. The rumor is that Apple may abandon Sigmatel components for the next version of iPod. As a result, this is a way for Sigmatel to remain active and competitive in the digital audio player world.

[Felix Torres]

The conclusion seems a bit premature to me.
Is Denon having trouble handling Rio? No doubt; just look at the way they've mismanaged the Karma player which is technically still on the market but almost impossible to get yet hasn't been updated or replaced or officially killed.

But, unless I missed something, the announcement that they sold off most of the Rio patents and IP doesn't say they're killing Rio; just that they need money badly enough to sell off a revenue stream. This is more like SGI selling off its 3d graphics portfolio to MS and its 3d hardware division to Nvidia so they could focus on Linux servers (ha! brilliant! Not...).
After all, the article expressly indicates Rio retains the right to *use* the tech under the patents...

More likely, I think, is that Sigmatel wants to bundle their chips with the patent rights and intends to sue competitors they think are violating the patents. Competitors that just *might* be Rio suppliers.
This being a course of action Rio can't take themselves...
(Would be tough to sue your own suppliers, no?)
...it would be best for Rio to take the money and let someone else take the heat...
(Especially if the main target is Apple. :-) )

Just speculation, though.
I do hope Rio doesn't just fade; their players have always been top notch and the really did sweat out the interface and firmware.
(Power-management used to suck, though, but eventually they got it more or less right. ;-) )

I've been hoping they would release a Karma follow-up for a while, so I wouldn't have to go with Plan B (Creative Labs) for my next player...
Gonna keep my fingers crossed and hope the other shoe is a lawsuit and not a liquidation...

[Jeremy Charette]

I agree with the sentiments above, but I'm not sure they can afford to keep up with Apple. As Felix said, that's probably why they're selling the rights to use their patented technologies, to generate additional revenue. I too liked the Karma, but hated the form factor (as did many others). I was really looking forward to the Chroma, but it looks like that will be vaporware, as nothing has been heard about it in almost a year; and they have canned their entire R&amp;D team.

It's not looking good.

Here's what I think the problem is: there is little or no profit in hardware, especially at today's market prices. Rio has no supplemental revenue stream, as Apple does with iTunes and the iTunes Music Store. This is why Apple licensed the iPod lineup to HP, in order to get iTunes on millions of HP desktop and laptop computers.

Rio also has no other product line than their MP3 players, whereas Apple has a diverse product lineup. Apple can take profits from other product lines and put it into it's iPod R&amp;D and marketing efforts. Rio has very little margin to play with, so it has very little capital available to re-invest in R&amp;D and marketing.

The era of big business is now. It takes a company like Microsoft to break into a market with strong existing leaders. Witness the game console marketplace, where Sony was well entrenched. It cost Microsoft over a billion dollars just to compete, nevermind win. They have only started recouping some of that investment in the last year. I suspect it will take a similarly large investment to unseat Apple and the iPod.

[klinux]

Here's what I think the problem is: there is little or no profit in hardware, especially at today's market prices. Rio has no supplemental revenue stream, as Apple does with iTunes and the iTunes Music Store.

Not true. Apple makes its profit in hardware, namely iPods. iTunes the application itself makes no profit and iTunes Music Store has only recently broken even or earned a slight profit.

The problem is that Apple can charge a premium for its product. Fans say it is superiorly designed; detractors say it is hyped marketing. Either way Apple can make money doing it.

Rio and others cannot find a way to charge a premium for their products despite providing additional functionalities that the iPod lacks. That is the problem.

[Jeremy Charette]

I hate to say this, but you're wrong.

Steve Jobs publicly stated that iTMS nearly began turning a profit in it's first quarter of operation, over 15 months ago.

"Apple said in its June quarter earnings conference call that the iTunes Music Store was close to break-even in its first quarter of operations."

In addition, the iTMS makes approximately 26% profit on every song sold after all costs including credit card processing (according to analyst estimates). That works out to about $800 million a year in revenue , and $206 million in profits.

To give you some idea, in Q4 2004, iTMS revenue accounted for approximately 4% of Apple's revenue, but around 20% of Apple's profit for the quarter.

According to the Motley Fool (http://www.fool.com/community/pod/2004/040415.htm), Apple's net margin on iPods is approximately 4%. That's 4% of the wholesale price, not the retail price. They're not making much money on it.

Rio is charging the same price for the Carbon as the iPod Mini, and likely has approximately the same manufacturing costs. The reason Apple is charging a premium for their products is to increase their profit margin which is slim as it is. It's also the reason Apple is discontinuing all non-Photo iPods, it doesn't make sense to sabotage sales of $349+ iPods with a $199 unit. Limit consumers to the most expensive models, and they'll buy them instead of the lower margin entry-level models.

Trust me when I say I know more about this than you do. So does Robert Cringely (http://www.pbs.org/cringely/pulpit/pulpit20050505.html).

[Jason Eaton]

Yeah, does not pass the smell test to me either. The rumor is that Apple may abandon Sigmatel components for the next version of iPod. As a result, this is a way for Sigmatel to remain active and competitive in the digital audio player world.

I'll add some more fire here. Yes the rumor is that Apple will be leaving the chipset behind and running with... drumroll please... Intel. So not only will Intel get the PC chipsets but the iPod chipsets.

So it would seem wise for SigmaTel to "Re-invest" into their own chipset by acquiring patents that were held by Rio (gapless playing, cross fade, etc) and beef up their product to make it more desirable to the market in an attempt to woo more suitors once/if Apple leaves. It also gives them legal rights to patents and legal options against infringers which seems to be the new business strategy these days, prosper throuh litigation.

Just some Friday Armchair opinions.

[Felix Torres]

So it would seem wise for them to "Re-invest" into their own chipset by acquiring patents that were held by Rio (gapless playing, cross fade, etc) and beef up their product to make it more desirable to the market in an attempt to woo more suitors once/if Apple leaves.

Just some Friday Armchair opinions.

...or to extort patent money out of Apple to make up for the lost business.
8)
I doubt Apple has been paying for stomping all over Rio's patents and its likely that with all the ownership changes Rio's gone through, nobody stopped to think of it.

Rio was the first with a *lot* of basic features like on-board playlist creation/editing, usage tracking, dynamic playlists, etc, etc...
Depending on the wording of the patents, there's gold there.
You just need to spend to unleash the hounds of law... ;-)

BTW, here are the press releases:
Rio: http://www.digitalnetworksna.com/company/press.asp?ID=611

Sigmatel: http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&amp;newsId=20050726006011&amp;newsLang=en

Interesting details:

1- Rio has zero-cost access to the sold IP if they use Sigmatel components. :-) So Rio is *not* folding.

2- Sigmatel got the hardware design engineers behind carbon and Karma and Forge. So it sounds like they may be looking to go into the system design and licensing business.

[klinux]

Trust me when I say I know more about this than you do. So does Robert Cringely (http://www.pbs.org/cringely/pulpit/pulpit20050505.html).

Trust me when I say I do not. Why should I (unless you work at Apple)? Quoting Cringely does not help your case as he is only nominally better than Dvorak. Each of them has a long history and make plenty of vague predictions. Many are right but more are wrong.

It is funny you mentioned Jobs because he is the one that said that the purpose of ITMS was to sell iPod. Has he ever said that ITMS is doing so well, we are selling iPods just so people can buy from ITMS? Rather than working out numbes, making assumptions, why don't you quote something from Apple's 10-Q, 10-K filings that says ITMS is making more money than iPod. I love to pick out figures for you but leaving for a two week vacation in India. I will give you a start though, Apple's net sales of iPod is $1B in 5/4/05's 10-Q.

[sojourner753]

It is funny you mentioned Jobs because he is the one that said that the purpose of ITMS was to sell iPod. Has he ever said that ITMS is doing so well, we are selling iPods just so people can buy from ITMS?

I have to say that I think the hardware has always been Apples thrust. If it was all about iTMS, then why not open it up to other devices?

[Jeremy Charette]

Thanks, I'll do that. I can read a financial statement, thanks. But to be honest, I don't need to. I have a Master's in Manufacturing Engineering. I have extensive training and experience in microelectronics manufacturing. I know what the costs and margins are. Even at the elevated prices they are charging, they're not making much more than 3-4% profit on wholesale prices, which are approximately 60-70% of retail prices (yes, I do know people who work at Apple). The profit margin on iTMS is much higher than the iPod.

Re-read what I posted. I did not say iTMS is a huge revenue center for Apple. The iPod is. But iTMS contributes more to profits than does the iPod. This is part of the strategy behind getting rid of the entry-level iPods, because the margins on the Photo are higher (more demand=higher prices), thus they can force consumers to pick the higher margin model by eliminating the lower cost option.

But what do I know? :roll:

[klinux]

Hey I am back and thus reviving this discussion! :)

So Jeremy, you can read a financial statement but you do not need to? A little bit arrogant, don't you think?

And don't think slugging credentials around here bolsters your conjecture. I am in the marketing analytics group in the finance department of a company with $50B market cap. I think I know what I am talking about as well.

Unlike you, however, I have long since learned that in virtually wherever I go in life (Digital Media Thoughts included) I am often surrounded by smart people - many more talented than I am. Therefore, talking about credentials is much less useful than actually doing the work in convincing people of what you believe in.

Jeremy, rather than 3%-4% this, 60%-70% this, maybe this and maybe that, look at my shiny degree, and thus ITMS makes more profit than iPod, why can't you do what I asked you for in the first place which is to get something concrete? I would love for you to show me that in Q205, 05 YTD, whatever, ITMS made $X profit and iPod made $Y profit and X>Y - I would be glad to learn something new and so would most on DMT IMHO.

Lastly, I asked (rhetorically) whether you worked at Apple, not whether you knew people who works at Apple. I too know people who works at Apple but that does not make automatically add weight to every statement I make about Apple. I certainly would not parade that fact around like you as if it is a gold medal or something.

The world is small Jeremy. As soon as you say you have a MA, you will learn that someone has a PhD, or if you have 10 year experience in someone will have 20 year experience, or if you know someone, someone will know that someone's boss. You could easily and conclusively end this debate and educate us/me with probably a dozen words: "ITMS made $X profit which is more than iPod as shown here &lt;insert document>" Instead, we get "trust me", "Cringley says so", "here is my degree", "I know people", and "what do I know?"