Thomson Multimedia is working to develop a new version of its patented MP3 technology in a bid to stave off rival Web audio formats that achieve similar or better quality using smaller files. The France-based company on Tuesday said the new format, dubbed MP3Pro, will offer the same audio quality as the MP3 format -- by far the most popular audio format on the Web -- in about half the file size. The companies said the new format will be compatible with existing MP3 content and players. It will be available in mid-2001. Although MP3 remains the de facto Web audio standard, it faces growing competition from companies such as Microsoft and RealNetworks, which are making inroads with more efficient formats. Open-source programmers also are working to offer a license-free alternative, and standards groups are developing a next-generation audio and video format that may supersede MP3 but is not compatible with existing MP3 players. The MP3 format is the most popular with music listeners and should remain so for some time, but it likely will be replaced by formats that offer better sound quality and take up less encoding space, said Ben Sawyer of Digitalmill, a company that consults on emerging technologies. "I'm surprised that (Thomson) reacted to the threat so quickly," Sawyer said. "But if they (had) continued to sit idly by, their technology would fall by the wayside." MP3Pro is being developed by Coding Technologies, a spinoff of the Fraunhofer Institute for Integrated Circuits, which shares patent rights to the MP3 format with Thomson. Thomson and Fraunhofer charge licensing fees for the use of MP3, and with MP3Pro the companies may be looking to create a format compelling enough for music distributors to buy. One key factor in keeping formats relevant is the "bit rate" at which audio files are encoded. MP3 streams at a bit rate of 128 kbit/s. Some competing formats stream at a bit rate of 64 kbit/s, offering the same quality while taking up less bandwidth for streaming companies and less memory for consumers. Thomson said MP3Pro will match the 64 kbit/s, allowing streaming companies to save money on audio delivery and customers to store more files on limited memory devices such as portable MP3 players. "The race is who can give you quality at the lowest bit rate -- obviously because you have smaller files, and you can pack more onto, for example, a Flash memory," said Gartner analyst P.J. McNealy. "Right now the battle is at 64 (kbit/s). Who can stream best at 64. It's no longer at 128." Playing catch-up With MP3Pro, Thomson is challenging competitors such as Microsoft and RealNetworks, which have released formats that some industry analysts say are superior to Thomson's current MP3 format. Microsoft's Windows Media format already offers a 64 kbit/s encoding rate and is positioned to create the most serious challenge to MP3 to date. In addition to pioneering a lower bit rate, Microsoft technology supports anti-copying features which has made it a leading choice among record labels gearing up for commercial online distribution plans. The MP3 format does not support encryption or other digital rights management features. In November, Warner Music Group struck a deal to use Microsoft's Windows Media as its primary format for commercial audio downloads over the next three years. In addition, three of the four other major record labels -- Bertelsmann's BMG Entertainment, Sony Music Group and EMI Recorded Music -- use Windows Media. The formats may face other competition. Irritated that widely used technologies come with strings attached, open-source programmers are creating MP3-compatible formats to offer Webcasters and Web music developers a license-free alternative. Internet standards groups also are working on a next-generation audio and video format, MPEG-4, which would ostensibly replace MP3 down the road. MPEG-4 fixes several quality issues of MP3, although the real interest in the format to date has focused on the video applications, which include several new interactive features. Jack Moffitt, one of the leaders of Ogg Vorbis project, an MP3 open-source alternative, said Thomson's MP3 overhaul suggests a sign of the growing precariousness of its position. "Why would they laud the new (MPEG-4) technology and then turn around and say, 'What we should have done is go back and fix MP3?'" he asked. Thomson said MP3Pro has the advantage of being built on a format that's already gained popularity. "This development of MP3Pro was really done to address a competitive need because there are other codecs that have built on the success of MP3," said Dave Arland, director of public relations at Thomson. Aram Sinnreich, senior analyst at Jupiter Media Metrix, said Thomson has the MP3 brand behind it, but "they're a little late on this because they're competing with some great powerful players like Microsoft." "Clearly, Microsoft has a lot of accomplishments under its belt and is poised to be one of the dominant players in the digital music space in the perceivable future. So anyone who wants to compete on any front, such as the effort by Thomson and Fraunhofer to compete with them on the codec front, it's going to be a hard, long climb," he added. Sawyer agreed that Thomson's biggest asset may be the MP3 name and brand, which is one of the most recognisable names on the Web, synonymous with Net music in the way Kleenex stands for tissue paper. "There are going to be a lot of competitors for the next few years," Sawyer said. "The MP3 craze happened almost by accident, but now there is a real race going on." News.com's John Borland contributed to this report. 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