There are two categories for acoustic pickups these days. Magnetic (soundhole) and piezo (under saddle). There are a few people out there doing other things with piezo, but not many.
First of all, letís look at how each work. Magnetic pickups are really just electric guitar pickups, voiced for a more acoustic sound. They will have either one (or more) magnet wrapped in copper wire, or a magnet with pole pieces attached, around which copper wire is wrapped. When a metal string vibrates within the magnetic field of the pickup, it disrupts the field, which (if you remember your basic magnetic theory) creates an electrical current which varies according to the vibration of the string, which is to say an audio signal. Magnetic pickups have been around since the 1920s, and the electric guitar was originally just an acoustic with a pickup. The idea of using them as a "soundhole" pickup for flat tops came about in the 1950s and 1960s. The D'Armond sound hole pickups where some of the first aftermarket pickups ever made, and the Martin D-18E was made famous by none other than John Lennon. The technology has advanced a great deal, and there are some very good magnetic pickups these days. The two best these days are the Sunrise (which has been the top of this market for probably 15 years, and is still as good or better than anything else out there) and the Fishman Rare Earth pickups. Leo Kottke has been relying on the Sunrise as his primary sound source for years, though he uses it with a mic. Soundhole pickups can be relatively cheap, and most are easy to install. They can not, however, be used with nylon string guitars, as they require the guitars strings to be magnetically conductive, which nylon strings are not.
Piezo pickups use piezo crystals, which respond to vibration by making an electrical current. The original versions of the piezo pickups (Hot Dots and Fraps) where small transducers which you would attach to the inside of the top of your guitar. These where very prone to feedback, and did not sound very good. In the early to mid eighties, someone (either L.R. Baggs or Barcus Barry, I do not remember which at the moment) came up with the idea of putting individual piezo crystals under the saddle of the guitar, one under each string. The pressure of the strings on the pickups made them less prone to random vibrations of the top. This helped a great deal with the feedback, but it still did not sound very good. There was an additional issue of placement of the crystals within the pickup. If they were not lined up directly under the strings, the balance between the strings would be inconsistent. The real problem with piezo pickups, however, is impedance. Your typical microphone puts out any where from a few hundred to a thousand ohms. A magnetic pickup puts out around 10,000 ohms. Piezo pickups put out around 100,000 ohms. As a result of this, the signal coming out of them has a very difficult time driving long cable runs, and even short runs are a problems.* The preamps which started coming out in the seventies and eighties were really impedance matching boxes, so the piezo pickup could drive longer cable runs, and to restore the low end of the signal. Additional functions, such as an EQ, a volume control, and a notch filter (to help control feedback) came along as you got more and more expensive pickups. Around the late eighties and early nineties, two things happened. The Fishman company came up with a way to create a piezo electric film, which went the whole length of the pickup. This eliminated the issue of inconsistent balance between strings. Rick Turner (the name amongst names in pickup design for the last thirty years or so) started working on a new way of implementing the piezo pickups. He found a type of cable (used for some purpose by the military) which was very similar to what Fishman was doing. Rick combined this piezo cable with a preamp which was built into the guitar (attached to the endpin jack, in fact). This was the (justly) famous Highlander. Rick Turner has left the company, but the Highlander is still one of the most popular pickups on the market. Both Fishman and L.R. Baggs also make very good pickup/preamp combinations. You would be hard pressed to find a maker who does not use one of these pickups as original equipment on there guitars. Fishman makes the pickups for all Martin, all Gibson, and (until recently) all Taylor guitars which come with built-in electronics. When you see an acoustic guitar player on stage, the chances are good they are using an under saddle pickup/preamp combination. This is also the basic system used for acoustic/electric guitars such as the Parker Fly. Piezo also have the advantage that, because they do not rely on the magnetic conductivity of the strings, they can be used on nylon string guitars.
Under saddle pickups are not, however, something which can be moved between guitars. They must be installed by a qualified and experienced repair person. It is essential that the bottom of the saddle slot be flat. If it is not, then the pickup will not be under consistent pressure, and the balance of the strings will be inconsistent, and it will also be more prone to feedback. This procedure is also expensive. A Fishman Matrix pickup/preamp combo is about $125.00, with installation costing another $125.00-$175.00.
Taylor has come out with a new system, called the Expression system, co-designed by Rupert Neve. It is actually an old idea with some new electronics, and a slightly different piezo element. It is what I would call a combination system. These have been used for a long time, and can be implemented in a variety of ways. The most common of these is probably the use of a under saddle piezo pickup with a small condenser mic inside of the guitar. This is (last time I asked Jim Olson) what James Taylor is using. Fishman has out several versions of their Blender system, including one which uses a small Crown condenser with their Matrix under saddle pickup, and another which uses the Crow mic with their Rare Earth magnetic pickup. Probably the most well know example of a combination system was Michael Hedges set up, which was an old three transducer FRAP piezo set up used in conjunction with a Sunrise magnetic pickup. For him, the magnetic gave him the low end response he needed, as well as picking up all of his right hand tapping. The piezo pickups gave him the sparkle and "woody" tone he was after. This is essentially the system which Taylor has come out with. On all guitars with pickups in the 500 and above series come with the new system. It uses a magnetic pickup embedded in the neck/fingerboard extension on their NT necks (a seriously cool innovation for a factory guitar in it's own right, BTW), along with two of what they are calling "dynamic body sensors," which are really just another version of a piezo transducer, similar in concept (though not design) to the old FRAP transducers. These are mixed by a preamp which was designed by Rupert Neve (yes, of the console fame). The system (the one time I have heard it) did not blow me away. It sounded (to me) like a nice pickup system, but nothing all that spectacular. Some people will, I am sure, love it. The big problem I have with the system is that it can not be put into anything but a Taylor, and I am not fond of Taylors (one of the results of having a father who is one of the top small shop luthiers in the country).
None of these systems will ever sound as good as a good mic on a good guitar, and none of them will ever recreate the sound of YOUR guitar. For my ear, the best system for a reasonable price is the under saddle pickup/preamp systems out there. We put in more Fishmans than anything else, and I am very fond of them as a guitar player, a luthier, and a live sound guy. I would never (barring special effects) want to use one in the studio, however. They just do not sound good enough for that.
All of this is, I guess, a long way of saying that you can not use a soundhole pickup for nylon strings, and that no pickup will give you the results you want for recording, but can be fine for live work. I guess this way you really just have enough information to think about what you might want to use. If you really can not afford to have pickups installed in your guitars, and you can not use a mic, there are a few "stick on" piezo pickups out there. I would NOT recommend them, as they sound (to be honest) like shit, but they are out there. You might also want to try something like a B-Band pickup, which are quite common for pianos. They are basically an elongated version of the old FRAP and Hot Dot idea, made (I believe) with a piezo film. The thing is, they really need to be installed permanently to, so I don't know how well they would work. You could maybe hook up some kind of 1/4 inch jack to the leads and run them out through the sound hole, but you would still need to remove the strings in order to install it, and you would need to move it several times to find the best sounding location.
Good god, I talk to much. Three pages in Word when I spell checked it. Sorry.
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*(Think about it like this. A microphone has no problem driving a hundred foot cable, or even longer. However, an electric guitar sounds noticeably different as soon as the cable gets much above 20 feet. How much worse must it be with a piezo putting out 100,000 ohms.)
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