06/24 15:20 Diamond's RioPort sets broad Internet music strategy
By Scott Hillis
LOS ANGELES, June 24 (Reuters) - Diamond Multimedia Systems Inc.'s <DIMD.O> Internet music arm on Thursday unveiled a new version of its controversial Rio digital music device and said it would team with other companies to make it easier to get music over the Internet.
The deals announced by Diamond's RioPort division mark a big push to widen its efforts to bring PC-based digital music into more homes and allow consumers to create music libraries on their own computers, RioPort President David Watkins said.
"Relatively early on we recognized that what we really wanted to do was to solve both ends of the pipeline problem, the content providers on the one end and consumers on the other," Watkins said in an interview. "We want to make a more seamless experience for the user."
Diamond was one of the first companies to march into online music when it launched the Rio, a pocket-sized device that plays songs using the MP3 format that compresses music files so they can be sent quickly over the Internet.
The Rio quickly embroiled the company in controversy when the trade group representing major record labels sued to block sales of the device, saying it violated copyright laws.
But a federal appeals court handed the company an important victory this month when it ruled that sales of the Rio could continue because the gadget was not a recording device.
"The labels are seeing that they have to embrace this technology because the consumers are demanding it, the artists are demanding it, the market is demanding it," Watkins said of the ruling's significance.
RioPort was formed by Diamond to capitalize on the success of the device, which has sold hundreds of thousands of units and spawned several imitators since it hit the market last November.
Diamond, whose primary business is making graphics cards for personal computers, said earlier in the year it intended to spin off RioPort as a separate company. Watkins said Thursday's announcements marked another step toward that goal.
"The spin-off of RioPort certainly makes sense. We are set up as a separate entity to really go after this space," Watkins said.
The purchase of Diamond by another developer of graphics cards, S3 Inc. <SIII.O>, in a $180 million stock swap deal announced Tuesday, could help accelerate the spin-off process and boost growth of the fledgling venture, Watkins said.
"We want to complete it as quickly as possible but in the meantime S3 can bring significant resources to really invest in the business," he said.
As part of Thursday's deals, future versions of the Rio will be able to play files encoded using Microsoft Corp.'s <MSFT.O> Windows Media Audio format, which RioPort said delivers better sound quality than MP3 while taking up less memory space.
RioPort also formed pacts with InterTrust and Reciprocal, privately held companies that develop digital rights management technology that will ensure copyrighted music cannot be sent online without permission.
Such relationships are key if software and hardware makers want to provide the most popular music content, which is controlled by the big music companies.
"The key message from content providers was ... if we want this game to play out we have to include them in this process," Watkins said.
One content provider that joined with RioPort on Thursday is Audible Inc., a private company that offers spoken audio files such as news reports from the Wall Street Journal and novels by authors such as Stephen King over the Internet.
The new version of the Rio launched on Thursday, the PMP500, will support Audible's encoding format.
The mew Rio is equipped with 64 megabytes of memory with space for a 32-megabyte card, enough for about two hours of CD-quality music. Like earlier versions, there are no moving parts, so the player does not skip.
The company has also contracted with GVC Corp. <2322.TW>, an electronics maker based in Taiwan, to mass produce the Rio, which RioPort will license to other companies.
Watkins said licensing deals were expected to be a major source of revenue for RioPort, and Diamond is the first licensee of the platform. He said RioPort was also developing digital music players for cars and home stereo systems, Watkins said, but gave no further details.
((Scott Hillis, Los Angeles newsroom, 213-380-2014, scott.hillis1@reuters.com))
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