Hot Game: Musical Cell Phones

Among the reasons why next year will be big for music phones is that telcos had pushed, almost exclusively, for camera phones in the hopes that subscribers would swap snapshots and drive up data service revenue. But that strategy didn't go exactly as planned. Now the next big hope is that MP3 phones will inspire customers to sign up for new faster third-generation wireless service to download songs.

Charter analyst Snyder says he sees few barriers for adding music players to phones, adding that it's both easier and cheaper than adding cameras.

Unlike cameras, which required expensive parts, most of the basics for a music player are already inside cell phones, says Snyder.

"Adding MP3 capability to a phone is inexpensive because the phone already includes most of the functions needed," says Snyder, "like audio interface, a power amplifier and a headphone jack."

One of the major shortcomings phone makers have encountered with music is limited memory capacity and a cumbersome music navigation system, say analysts.

But technology rolls along, and advances in flash memory easily allow more than an hour's worth of songs to be stored on removable cards. And with Apple's iTunes software, there's great hope that some of the much-praised music organization features will be worked into new phones.

Though 2005 will likely be a big year for MP3 phones, the music phone contribution to huge sales volumes probably won't come until 2006, say analysts. Since 2004 was such a phenomenally strong year for phone sales, demand may take a bit of a breather next year.

New markets like Asia and South America certainly contributed to cell-phone sales growth in 2004, as did the so-called replacement segment, where users traded up from their old phones for new color-screen, clam-shell camera models.

Sanford Bernstein analyst Paul Sagawa sees the MP3 phone trend not as an overnight success, but growing over the coming years as 3G takes hold and hard disk storage becomes available in phones. He expects total phone sales will grow somewhere between 10% and 12% next year.

"Long term," says Sagawa, "I expect most phones above entry level will have both camera and MP3 by 2006."

Snyder sings a more optimistic tune. While he expects phone sales to cool off a bit from 2004 levels, he says 2005 sales volumes will hit 14%.

"MP3 phones, if designed and promoted correctly," he says, "could certainly fuel the fire next year."