Cingular: Giving Away the (Music) Store

The cell-phone carrier's new mobile music strategy allows users to download songs to handsets at no chargebut players are a different story

Telecom companies are known for developing products around proprietary technology and charging customers a rich premium. That has been true since the dawn of voice mail—or even calling itself. In recent years, wireless companies have relied on proprietary, high-margin services such as text messaging, and arcane wireless data standards to boost profits.

Now, alarmed by the success of Apple's (AAPL) iPod, wireless companies such as Verizon Communications (VZ) and Sprint Nextel (S) have waded into the mobile-music market with proprietary music stores that charge customers as much as $2.50 to download a song over the wireless network. Starting next year, Cingular will allow consumers to download songs over the air at no charge.

The company, which is owned by AT&T (T) and BellSouth (BLS), said Nov. 2 it was launching a new music-playing cell phone that can download songs from PC-based music subscription services such as Real Networks' (RNWK) Rhapsody and Yahoo! (YHOO) Music Unlimited.

New Middlemen

Cingular will allow people to download music to compatible phones for free, although consumers will pay a monthly charge in the range of $15 for the ability to download songs from those services to a portable music player. "Right now, we're focused on getting people to view mobile music as something that's interesting and exciting. You've got to build a base. Once you do that, there are all sorts of ways to drive revenue from it," says Jim Ryan, vice-president of consumer data services at Cingular.

Cingular's music strategy is much closer in nature to those found in the computing industry, where open standards such as instant messaging and the language of the Web hold sway. The idea of giving a service away to build a customer base is standard-operating procedure for Internet companies. Yahoo, Google (GOOG), and countless others have built their businesses that way. And Cingular's strategy of partnering with the music industry is similar to the partnerships found in the Internet world.

Telecom companies tend to build products in-house, functioning as owners or gatekeepers of content. For telecom companies, the goal is to be the primary or sole link to the consumer. Cingular is unusual among telecom companies because it's allowing third parties such as Yahoo and Rhapsody to step between itself and the consumer. "We just think these other companies understand the music business better than we do," Ryan says.

Ad-Free—For Now

It's not clear that the music service, on its own, will be a huge revenue driver for Cingular. But music subscription services will pay Cingular a fee for steering new customers toward them, Ryan says. He declined to disclose financial details of the arrangement. Cingular also expects the music service to drive sales of advanced 3G phones, high-speed data services, and related products, such as XM Satellite Radio (XMSR). Cingular charges $8.99 a month for 25 XM radio stations. It offers streaming music, too (see BusinessWeek,com, 7/28/06, "A Cingular Stones Concert").

"We think that music will help us retain more of the right kind of customers, and that it will encourage them to stick around longer, increasing their value to us over time," Ryan says.

There won't be ads on Cingular's service, at least for now, while the carrier learns more about its new medium. "People regard mobile phones as very personal devices. It's not like broadcast TV. To the extent that you do mobile advertising, you have to make sure you are offering something that people really want," Ryan says.

The most curious aspect of the new service is that Cingular already has a relationship with Apple, selling an iTunes-equipped phone (see, 10/19/05, "Apple's Phone Isn't Ringing Any Chimes"). Ryan says the new service doesn't necessarily conflict with its relationship with Apple, which is itself rumored to be creating an iPod phone (see BusinessWeek,com, 10/21/06, "The Apple iPod Turns Five"). "We already have addressed the iPod market, and now we're addressing the rest of the market," he adds. And that could be huge: Ryan says only about 10% of the market has an iPod or other digital music player.

Hit or Miss

Clearly, Cingular's new music service is no get-rich-quick scheme. And there's no guarantee that it will work, even over the longer term. Internet and tech companies that build sizable audiences often fail to generate much revenue. And bundling music into a package of services is no sure thing, either. Apple, whose business is geared around proprietary standards and a limited array of products, has prospered in recent years. Conversely, Yahoo—which has built its company around open standards and a wider collection of products—has struggled.

Still, there are plenty of examples of Internet companies that have built a huge base of customers and increased revenue later. eBay's (EBAY) Skype is one. Google is another. The lesson? When the strategy works, it works really well.

Before it's here, it's on the Bloomberg Terminal.