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Orchestrating a Revved-Up ROKR

On the 11th floor of the Cingular Wireless headquarters outside Atlanta's hip Buckhead neighborhood, executives are plotting a comeback. Some 850 miles away, in the outskirts of Chicago, officials at mobile-phone maker Motorola (MOT) are doing the same. Though an early move by both companies to put music on mobile phones was a disappointment, they don't plan to make the same mistake twice.

The ROKR, unveiled by Cingular and Motorola in partnership with Apple (AAPL) in September, failed to meet expectations. It has a sub-par limit of 100 songs and has been dogged by reports of rampant returns. American Technology Research analyst Albert Lin estimates it's being returned at a faster clip than the average phone.

WET FEET. Motorola says it has shipped a surprising 500,000 of the phones worldwide and disputes higher-than-usual return rates for the device. Still, Cingular and Motorola officials acknowledge their strategy for releasing the phone was a bit of a blunder.

They allowed its introduction on the very same day that Apple unveiled its ultraslim iPod Nano, a wisp of a gadget that holds up to 1,000 songs.

By comparison, the ROKR is bulkier and not nearly as sleek (see BW, 9/19/05, "Apple's Phone Isn't Ringing Any Chimes").

ROKR RENOVATION. Motorola and Cingular have bigger and better things planned for 2006. BusinessWeek has learned that Motorola will introduce a revamped version of the ROKR in the first quarter, updated to address the main criticisms of the first release.

Expect a phone with a 1 megapixel camera, a 3.5 millimeter earphone jack (same as the iPod uses), and enough storage capacity to hold 1,000 songs -- all capabilities Motorola has confirmed. The current phone's basic design will be replaced by a sleek new look, which sources close to the company say will be an elegant slider format. "We've learned a lot," says Motorola CEO Ed Zander. "We're definitely building on the ROKR experience."

The first ROKR is compatible with Apple's iTunes software, which allows users to download songs from the Apple site for a fee. As to whether the new ROKR will be compatible with iTunes, Motorola says that's up to Cingular and Apple. "We will definitely do an iTunes version if that's what Cingular wants," says Ron Garriques, head of Motorola's phone division.

Odds are, iTunes will be part of the package, though Garriques says Motorola and Cingular haven't agreed to a lineup beyond Dec. 31.

What Cingular does plan is the introduction of a new range of services over time. On Nov. 14, Cingular unveiled MobiRadio, which streams commercial-free digital music -- from hip-hop to classical -- directly to mobile phones. "We want to have enough services so that we can say yes to most people's musical interests," says Jim Ryan, Cingular's vice-president of consumer-data services.

SLICKER PITCH. Like their counterparts at Motorola, Cingular execs acknowledge the ROKR's launch wasn't flawless, but they note it was a critical first step. While hardcore iPod enthusiasts are unlikely to be impressed by a device that carries only 100 songs, Ryan explains that the phone's target market is the person who doesn't have an iPod and simply wants to hear some music from time to time. "What we're doing with Apple is the first simple means for people to carry music around with them," he says.

And though the ROKR has been panned by design and portable-music experts alike for its underwhelming capacity and so-so looks, sales have been far from dismal (see BW Online, 10/18/05, "Is ROKR Missing That Special 'Magic'?"). Consider that Motorola's wildly popular Razr sold about the equivalent number of units in its first couple of months. "It's a little early to call it a dud," says Moors & Cabot wireless analyst Matthew Hoffman. "And even if it doesn't do great at Christmas, it's important for Moto to get its feet wet."

Cingular plans ads, to run over the next three months to six months, that are designed to educate consumers about its lineup of phones and services, including iTunes. It is also hard at work training retail sales people to present the ROKR as something other than an iPod phone -- a task Ryan admits wasn't adequately addressed. But, says Ryan, "We didn't enter thinking that the game would be won in 90 days post launch."

"DO SOMETHING DIFFERENT." Next year, Cingular will start adding to its slate of music services. In addition to iTunes and MobiRadio, it plans a suite including music I.D. capability and a service that will zap new releases of songs and news from your favorite bands. And it plans to include a service that will let users download full tracks over the air, as Sprint Nextel (S) has already done (see BW Online, 10/27/05, "Sprint Races into Mobile Music").

Ryan downplays the significance of over-the-air downloading. Whereas Sprint and Verizon Wireless see such downloads as the focal point of their music service because they allow the providers to capture more revenue as tunes travel directly over their networks, Cingular regards it as a supplementary part of its strategy.

Taking that track in quest of profits, Ryan argues, is a flawed strategy, since it means pricing the service too high -- like Sprint's $2.50-per-download fee, $1.50 more than what an iTunes song costs. "If you can't do something different over the air and offer customers the ability to do more, what makes them pay $2.50?" says Linda Barrabee, a Yankee Group wireless analyst.

TEST MARKETS. Don't be fooled, however. Pricing barriers aren't necessarily the only reason Cingular isn't focused on an airwaves approach. Both Sprint, and especially Verizon, which is expected to launch its music service by February, are much farther along than Cingular in the deployment of so-called third-generation networks capable of delivering higher loads of calls and data.

Cingular has introduced super-speedy bandwidth in a handful of markets, but won't reach most of the nation's big cities until the end of next year. "Cingular right now is a bit behind in terms of its network capabilities to support these kinds of applications," Barrabee says.

Knowing that Cingular's network team is pushing to catch up, Ryan is looking further out on the horizon. Behind the scenes, he's testing a number of music-oriented services, including a music I.D. service formerly used by AT&T Wireless, a competitor that Cingular bought in 2004, and even an over-the-air downloading service, called 1-2-3, developed by Single Touch Interactive.

"OPTIMAL PLACE." By pressing the pound key and three digits on your phone -- #1-4-7, for example -- a text message is sent saying you can download any one of a handful of ringtones -- say, a Kanye West tune for $1.99. The system has the capability to do full tracks as well. Ryan says the service is live in a few markets on a trial basis. "We're judging its success and determining whether it will be included in our broader music offerings," he says.

By the middle of 2006, Cingular expects to offer subscribers the best array of music options anywhere. Those who prefer iTunes will have the Apple service available. Those who want to transfer music from their CD collection will be able to choose from a number of Cingular phones with a capacity of 1,000 songs. And if they've got 900 songs loaded and want the freedom to download more while they're out and about, they will be able to pull something from the airwaves.

Ryan calls such a suite of music-centric applications, "the optimal place to be." The challenge will be getting there -- and doing it before the competition.


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