So if it's not

MP3.com

(MPPP)

or

Liquid Audio

(LQID)

, per yesterday's

column on digital downloadable music, who else looks hot?

One of the most interesting companies in the digital music business -- at least, among denizens of the message boards in the investment world -- is

e.Digital

(EDIG)

. It's a tiny company (the stock closed Thursday at 2 1/4, putting e.Digital's market cap at $250 million; revenue for the year ended March 31 fell 61% to $426,000) that nonetheless gets far greater attention than you'd expect from such a flea.

The stock spent much of last year wobbling around under a dime, started warming up in mid-April of this year and nudged up to $3.20 in late May.

e.Digital is a big, big favorite on the message boards, and it has attracted a horde of zealots to the ranks of its shareholders -- one of whom breathlessly informed me in an email last month that e.Digital "really is the next

Iomega

(IOM)

!!!" No comment.

The company's fundamental strength is its MicroOS file-management system -- in effect, a miniature operating system -- which has been optimized for pushing around the kind of large files you get from recorded voice and music. It has had some nice firsts, such as using for the first time flash memory in voice-recording devices.

e.Digital wants to be both a technology licenser and also a seller of music-playback devices. It has done design work for

Lanier Worldwide

, using its proprietary technology to develop a voice recorder for Lanier's Cquence Mobile/VoiceWrite medical document-management/dictation system. e.Digital has just begun shipping the handheld device as part of a $3 million initial order from Lanier.

But its big play is in digital music, as e.Digital moves toward the first mainstream non-MP3 portable digital music player. The company has formed a potentially powerful alliance with

Texas Instruments

(TXN) - Get Report

and

Lucent

(LU)

to get into the music-in-your-pocket game. Using TI's high-speed and relatively low-power digital signal processors and Lucent's Enhanced Perceptual Audio Coder, or EPAC, music codec -- a software-based system for storing and recalling audio files in relatively compact form without losing the sense of full-range audio reproduction -- e.Digital is trying to craft a landmark product.

Much of the buzz about e.Digital arises from its partnerships. This week, for example, it announced that it had licensed Liquid Audio's "secure player platform," or SP3, to fold into its product. This gives (at least potentially) e.Digital players both compatibility with the security (read: antipiracy) requirements of the recording industry's first-round

Secure Music Download Initiative

spec, and also the ability to play different formats ("platforms" in the lingo) for recorded music.

And it's been strengthening its own ranks, adding recent Intel retiree Skip Matthews, who drove flash-memory work at the chipmaker, to the board last month.

The company also picked up a $3 million equity investment last month from New York investment banker

Jesup & Lamont Securities

.

So where's e.Digital headed? I was puzzled -- this is a business with few self-evident truths -- and so sat down in late May with CEO Fred Falk and his top engineer to look at their products and plans.

There were no prototypes, even rough ones, of production-level portable music-players available when we met in Newport Beach. e.Digital does have a breadboard-level black box showing what it can do, but clearly a production design is not imminent.

Friends whose judgment I respect tell me e.Digital's player can offer very good audio quality, perhaps the best in the business, and absent any chance to test that or even experience it for myself, I have to defer reluctantly to their call. Let's take it as a given for a moment that e.Digital can provide superior audio playback.

I came out of the meeting with four distinct impressions.

First, I liked Falk, and I liked a lot of what I heard -- but remember that I didn't hear any

music

. For once I wasn't overwhelmed by hype and overclaim, but instead got what felt like the straight poop. Thanks, guys. Chalk up one for e.Digital.

Second, I worry a lot about e.Digital's reliance on superior audio-playback quality as the big value-add. The portable digital music market isn't an audiophile market now, and doesn't look to be anytime in the near future. Instead, it's based on casual listening, with cigarette-pack-sized players stuffed in a jeans pocket or hanging on the waistband of running shorts, with playback through tiny, tinny miniheadphones. I don't think anyone's going to be able to tell the difference between, say, perfectly-OK-level MP3 playback on a device like the wildly popular

Diamond Multimedia

(DIMD)

Rio (now available from discounters, by the way, in the neighborhood of $100, as second-generation Rios, with more memory and fancier cases, are about to arrive), and playback through the highly touted e.Digital device-to-be.

MP3-market customers aren't hi-fi buffs, and they're not into playing this music on $20,000 living-room stereos. This is a

portable

playback market ... where the noisy listening environment alone argues against high-quality reproduction, cheeseball headphones aside.

If your big strength is an irrelevance to your potential customers, do you succeed or fail? Seems to me that when your hot button isn't even on customers' checklists, high-quality playback becomes an abstraction, not a corporate asset.

Third, I worry about Falk's relative lassitude about getting a product to market. He wouldn't say anything about the partners e.Digital will join with to actually make, distribute and sell the finished portable players -- there have been occasional rumors that

Sony's

(SNE) - Get Report

interested, but I couldn't get a shred of confirmation on that. But he did say that he didn't think the player would make its way to market by this year's essential "Christmas quarter," which I think may be the last possible moment a new entrant will be able to squeeze into this market. I wish I felt a stronger sense of urgency -- a

lot

stronger sense -- at e.Digital about this rapidly evolving market's dynamics.

And fourth, I was astonished to hear Falk say that e.Digital believes there won't be a coalescing in this market around a single, dominant standard, but that several incompatible formats will all survive, with significant market shares. He sketches a vision in which kiosks are installed in malls and elsewhere, from which portable-music customers buy tunes. He thinks these kiosks will have to support several different formats of each song, and since there's no easy way to separate out those audio streams, he thinks these devices may just download all the formats into a buyer's player -- or at least, one multiformat file plus software that will adapt it to the player's preferred playback format.

Whoaaaaa.

That doesn't -- forgive me -- play with me. I think one format will certainly emerge as dominant, and as I've said, that will be MP3, and then MP4, its already visible successor. And players, almost by definition, never have enough memory for even one lean-and-mean file for each song. Indeed, the biggest complaint from buyers about Diamond's Rio is that it doesn't have nearly enough memory and thus can't hold as many tunes as customers want.

Taken together, those three big worries lead me to be highly skeptical about e.Digital's prospects over the next couple of years. The VHS-Betamax example is overused -- basically, the technically inferior VHS format survived, thanks to great and wide-vision marketing, while the clearly superior Betamax format sank like a stone because of myopic, narrow-vision marketing -- but it seems eerily appropriate here.

If e.Digital does have the technically superior technology and approach, but is (a) not focused on customers' requirements, (b) late to market and (c) unfocused, then the mean-spirited ghost of VHS-Betamax may indeed hover over this innovative company.

While MP3 may be inferior at present, there are enormous resources and forces working to make it better.

Microsoft

(MSFT) - Get Report

says it already has superior playback and smaller file size in its Windows Media system. There are new, not-yet-on-the-radar-screen entries coming from Japan, claiming both smaller files and better audio playback.

It's gonna get rough, very rough out there. And the gentlemanly approach of technically oriented e.Digital may not survive.

I know this column is going to stir a firestorm of responses from e.Digital enthusiasts, and I'll get pilloried -- again -- on the message boards for dissing their fave. Fair warning, letter-writers: I have borrowed the

TSC

staff

Hostile React-O-Meter

that is normally installed on

Herb Greenberg's

email box and have installed it on mine for a while. Fair warning...

I still think the digital-download music business is a pit of quicksand for investors. Too late to get into MP3.com, which may well prove to have been an IPO-only play. Big worries about Liquid Audio. And fears aplenty about e.Digital.

Of the three, e.Digital may be the best speculators' play. At its midday Friday price of around 2 1/2, it's certainly cheap enough to take a flier on a couple of thousand shares. If they move up to 10, 20, 50 over the next few years, you'll have a heck of a gain. But I'd mark any e.Digital investment as strictly speculative and wouldn't count on anything.

It's slippery and dangerous out there, friends. Watch out.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long Lucent, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.

As originally published, this story contained errors. Please see

Corrections and Clarifications.