By Andy Reinhardt Nokia (NOK) is upping the ante in the growing battle over digital convergence. The Finnish mobile-phone giant has staked a claim in the nascent business of wireless music-on-the-go, announcing a little-noticed deal on Aug. 9 with Loudeye (LOUD), a Seattle-based startup, to collaborate on technology for downloading songs over the air to mobile phones. If the partnership works, mobile phones could become stronger competitors to portable music players such as the Apple (AAPL) iPod. Equally important, Nokia could help mobile operators develop a lucrative new revenue source from selling and distributing digital music.
For the world's leading mobile-phone maker, this is only the latest step in a protracted effort to evolve handsets into multimedia gizmos. Nokia's phones have long included simple personal organizers and electronic games. In recent years, it has added digital cameras, FM radios, and support for downloadable ring tones and Java games. Nokia even launched a handheld videogame player last October, called the N-Gage, that doubles as a mobile phone.
Indeed, the company is so serious about digital convergence that it reorganized late last year, breaking out multimedia products from conventional voice phones. The multimedia group had revenues of $3.1 billion in 2003 and should grow 63% this year, to $5.1 billion, predicts analyst Richard Windsor of Nomura Securities, vs. $20 billion in 2004 sales for conventional phones.
JOSTLING FOR POSITION. The announcement from Nokia and Loudeye, a leader in digital content distribution technology, comes just two weeks after No. 2 handset maker Motorola (MOT) announced a collaboration with online-music leader Apple Computer to bring the popular iTunes service to Motorola phones (see BW Online, 8/5/04, "Apple and Motorola: A Smart Duet"). That deal will allow Motorola users to transfer digital songs from their PCs to their handsets starting in the first half of 2005. While it was hailed as a coup for Motorola, the deal with Apple could mean little to mobile operators, who don't make money when customers move a song from a PC to a phone over a USB cable or a short-range Bluetooth wireless connection.
By comparison, Nokia's deal with Loudeye is positioned as a bid to develop technology to help wireless carriers increase their music business. "The big difference is that it puts operators at the forefront, which is incredibly key," says Mark Mulligan, an analyst with researcher Jupitermedia in Britain. That's because operators, facing sagging income from conventional voice calls, are eager to find sources of revenue growth. They see wireless downloads of music and other digital content as a potential goldmine. "Everybody is jostling for position right now in digital music, especially in the mobile industry," says Simon Dyson, senior analyst for market researcher Informa Media Group in London. "All the operators want in."
Many have already made the leap. Since late last year, a half-dozen European and Asian carriers -- including Orange, mmO2, and KDDI -- have launched home-grown music-on-demand services that offer downloadable songs over the air. So far, they haven't really taken off. Researcher Strategy Analytics figures global sales of music and media by operators amounted to just $792 million last year, including revenues from both network usage and content fees.
DOWNLOAD DRAG. In part, that's because networks are too slow and costs are too high. Depending on the pricing plan, downloading a song over a GSM phone network can cost up to $17.58, says Strategy Analytics. Carriers typically charge more than $2 per song aside from network costs, more than twice the price of a song on Apple's iTunes Music Store. Nokia is likely aiming its new technology, which is likely to appear in 2005, at faster third-generation (3G) networks with higher bandwidth and lower data prices.
To compete with digital audio players, handset makers also have to improve their hardware. Many handsets from Nokia and rivals already can play music encoded in the popular MP3 format, and consumers will buy 10.8 million such phones worldwide this year, vs. 21.5 million dedicated digital audio players, figures Informa Media. Still, that represents only about 2% of this year's expected global market of 600 million handsets.
Music phones haven't fared better thus far largely because they generally offer poor audio quality, limited storage, and short battery life. Handset makers are working to fix these problems with better sound technology and more built-in memory. Analysts predict there will even be mobile phones with built-in hard drives, à la iPod, by the second half of 2005.
The phones also haven't been convenient to use. To get songs into the handset, users have to download them first onto a PC connected to the Internet (or copy them from a CD) and then transfer them via USB or Bluetooth into the phone. That's not exactly the optimal use of a device that's designed to communicate wirelessly.
BIG OPPORTUNITY. Nokia's new wireless download deal should help fix that. The company wouldn't comment on details of the Loudeye relationship other than to say that the companies are "working together to come up with a compelling mobile music experience." But Loudeye's market position suggests where things are headed. The six-year-old company offers soup-to-nuts software and services that help its customers offer legal, protected online content. In June, Loudeye doubled its size by acquiring the largest digital music company in Europe, Britain's On Demand Distribution (OD2). Like Loudeye, OD2 didn't sell songs directly to consumers but provided technology and know-how to online music sellers.
Working with Nokia, Loudeye will likely develop tools that make it easier for mobile operators to offer legit online music services. That could be a boon to carriers, who must now develop their own technology and painstakingly negotiate rights to sell song catalogs with music publishers. "The easier it is for carriers to make money from this, the more likely they are to do it," says analyst Neil Mawston of Strategy Analytics.
If Nokia gets the kinks worked out, the opportunity could be enormous. Informa figures that sales of MP3-enabled phones will more than double, to 25.3 million next year, and hit 116 million by 2008. Meanwhile, operators stand to rake in big money from services. They're already doing well with downloadable ring tones that let consumers personalize the sound of their phones: Strategy Analytics figures ring-tone sales last year topped $3.6 billion globally. Downloadable mobile music could be far bigger, topping $17.6 billion annually in 2009, the firm estimates.
RISING TIDE. What's in it for Nokia? Chastened a bit by charges that it's competing too much with operators for revenues from services like ring tones and downloadable screen savers, Nokia is now trying harder than ever to present itself as the responsible patron of the mobile business. Efforts like the venture with Loudeye are aimed at improving the overall technical and business ecosystem in the industry.
Nokia will certainly benefit if music phones take off and it manages to sell tens of millions of units. Its infrastructure business also will do well if Nokia sells packaged solutions with Loudeye that help operators get quickly into the mobile music business. But for now, the focus is on trying to raise the tide for everybody in the industry. Reinhardt writes for BusinessWeek in the Paris bureau