WHETHER on a crowded bus or taking a Sunday afternoon stroll, it’s hard to avoid people lip-synching to the likes of Gwen Stefani or Coldplay on their shiny digital music players.

While Irish consumers are spoilt for choice when it comes to digital audio players, they have to look overseas if they want to invest in companies involved in this area.

The big success story so far in this fledgling industry has been Apple Computer’s iPod digital music player. About 8.4m iPods were sold last year, accounting for almost a third of all digital audio players, according to a recent report from In-Stat, a US-based technology market research firm. It expects “the exploding market” for portable audio players to reach more than 104m units by 2009 from 27.8m last year.

“Apple’s done a brilliant job,” said Michael Bourne, a London-based fund manager with Close Finsbury Asset Management. “The iPod has become a must-have fashion item and it’s been interesting to see the extent to which people have been willing to pay a lot of money for it.”

The runaway success of Apple Computer’s iPod digital music player has seen the US technology giant’s shares more than quadruple in value over the past 2½ years to hover around $36.38 (€30.14) currently.

“So far, Apple has managed to stay ahead of the game, but because consumers are very fickle, it’s very hard for consumer electronics companies to get long-term sustainable business from one product line,” said Bourne.

There are plenty of other companies, such as South Korea’s Reigncom and Samsung Electronics, and America’s Dell, angling to take a bite out of Apple’s share of the market over the coming years. Bourne said the winners in the long-run will be companies that keep one step ahead of their peers when it comes to design, memory capacity and price.

Sony, which gave the world the Walkman, is hoping that its new hard-drive MP3 music player will burst iPod’s bubble.

Shares in Sony, whose electronics division made an operating loss of 35.29 billion yen (€264m) last year, have lost 6% over the past 12 months and are trading at about 3,820 yen.

“Sony had been lagging behind in this area, but the group is restructuring itself and the new chief executive [Howard Stinger] is very much into innovation,” said Richard Radcliffe, a fund manager with Anglo Irish Bank. “It’s hungry for success and there’s nothing like a company with an attitude like that.”

Competition is likely to continue to hot up among digital music player manufacturers over the next few years, according to Stephen Hollis, a technology analyst with F&C Asset Management. “Creative Technology and SigmaTel have both said this week that they are already having a tough time of it,” he said.

Singapore’s Creative Technology warned on Monday that lower-than-expected demand for its Zen and MuVo MP3 players will result in the group posting a loss for its fiscal fourth quarter to the end of June.

SigmaTel, the US manufacturer of flash-memory chips for MP3 players, came out hot on Creative Technology’s heels to alert investors that pricing pressure for its products has prompted it to lower its sales forecasts.

Creative Technology’s shares, which are trading at about 11 Singaporean dollars (€5.40), have slumped almost 40% over the past 12 months, while SigmaTel has lost nearly 40% to trade at around $17.89.

Companies that supply memory chips to the industry, such as Arm Holdings in the UK and STMicro in France, are likely to be squeezed by digital music player manufacturers as prices of these products come down.

Radcliffe sees mobile phone manufacturers as being the long-term winners. “Look around any office today and there are people with handsets that also act as cameras and radios,” he said. “The iPods and MP3s of today are living on borrowed time as the likes of Nokia begin to push handsets with MP3 capability.”

The area of digital music downloading is also becoming more competitive and recording companies such as the UK’s EMI group and America’s Warner Music Group (WMG) have been upping the ante over the past year to take market share from the likes of Napster and Apple’s iTunes.

Yahoo! rattled those operating in this field in May when it announced plans to enter the online music-subscription market with a service that costs less than half of what some rivals are charging.

Music retailers do not want to be left out in the cold. The UK’s HMV is planning a downloading service, developed in partnership with Microsoft, in September. “HMV should do well out of this. It’s a really powerful brand and they will have significant power when they’re dealing with the record labels,” said Radcliffe.

Bourne says that piracy remains the main threat to companies with music downloading services. “It may be changing, however, with companies such as Napster moving from offering illegal file sharing to becoming a legal distributor of music,” he said.

Meanwhile, the US Supreme Court ruling last week that internet music file-sharing companies can be sued for encouraging illegal downloading is another bit of good news for the entertainment business.

Investors in companies involved in digital music technology need to have nerves of steel as share prices are notoriously volatile, according to analysts. Stocks in the sector don’t generally offer the cushion of decent dividend yields, as they must plough money into research and development to stay ahead of the posse.