D&M Holdings Inc. on Friday announced that it will fold its MP3 player business, which the company markets under the Rio brand name. In existence since 1998, the Rio line currently includes the Rio Forge line of flash-based MP3 players and the Rio carbon series of hard drive-based devices.

The company said in a statement that it made the decision after "a determination that the mass-market portable digital audio player market was not a strong enough strategic fit with the company's core and profitable premium consumer electronics brands to warrant additional investment in the category." D&M expects to incur US$25.4 million in shutdown-related costs.

Stephen Baker, an analyst with NPD Techworld, told iPod Observer that two reasons likely drove D&M’s decision: “First, the fact that there’s only a limited pot in the market for anyone whose name doesn’t begin with ‘A’ and end with ‘e.’

“Second,” he continued, “is the business D&M is focused on. An MP3 player product line isn’t part of the bigger picture.” The company’s other businesses include ReplayTV, Denon, Marantz and other home entertainment products -- Mr. Baker noted that while the Rio is an audio product, it doesn’t really fit when compared to them.

”From a nostalgic standpoint,” he added, “[the end of the Rio] could be sad, since it was the first MP3 player. But a lot has changed since Christmas 1998.”

Mr. Baker noted that the Rio’s U.S. market share for the first half of 2005 was 2.9% overall, which broke down to 5.4% in the flash-based space and 1.2% in the hard drive-based MP3 player arena. Apple, in contrast, held 73.9% of the overall market –- 47.4% in flash and an overwhelming 91.1% in hard drive.

With such stiff competition to go up against, Mr. Baker observed: “If you don’t have a serious reason to be in this, it’s going to be tough to justify it to your shareholders.” He cited Sony and Toshiba as examples of companies that have good reasons for staying in a fight that’s currently Apple’s to lose.

”It’s hard to keep 90% of the market forever, but if they continue to keep the lion’s share of the growth, it’s possible,” Mr. Baker said of Apple.

Updated with quotes and addition information from Stephen Baker.