Omnifone's Musical Challenge to iPhone

Its subscription tunes service, MusicStation, debuts abroad well before Apple's phone. Nokia handsets will carry it. Will consumers go for it?

It is being billed as the mobile industry's answer to Apple's (AAPL) iTunes and iPhone: An all-you-can-eat, over-the-air, full-track music download service that will work across handsets from most manufacturers.

Offered by London-based startup Omnifone, the new MusicStation service will make its debut in Sweden on June 14 and be rolled out to other markets outside the U.S. in subsequent weeks. That means it will beat Apple's much ballyhooed new phone-and-music-player to market in Europe and Asia by months. Omnifone currently has no plans to enter the U.S.

"We will already be in all of the major European countries and many of the Asia-Pacific territories when iPhone hits the streets," says Rob Lewis, one of three founders of Omnifone, which was formed in 2003 with the aim of bringing digital music to the mass market. The company has $8.5 million in funding, primarily from its founders.

Keeping Good Company

No question, Omnifone has ambitious plans. Apple has set a sales target of 10 million iPhones within the first year, but Omnifone aims to have 100 million handsets around the world loaded with its MusicStation software over the same period. That would seem an outrageous goal except that giants such as Nokia (NOK), Sony Ericsson (SNE, ERIC), and Samsung already have added the software to their handsets and will start shipping preconfigured models in Sweden this week. Motorola (MOT) intends to follow soon after, Lewis says.

Music industry titans also are on board. Omnifone has struck international licensing deals with Sony BMG, EMI, Universal Music Group, and Warner Music Group (WMG), as well as a number of independent labels. And 30 mobile operators in Europe, Africa, and the Asia-Pacific region plan to offer the company's service in the coming weeks and months. First out of the chute is Norway's Telenor, which will launch MusicStation in Sweden and, if it's a hit, later consider rolling it out to the rest of its 80 million customers around the world.

Think of it as the anti-iTunes. Apple already has sold more than $1 billion in digital content from its popular online music store, and its move into handsets with the hotly anticipated iPhone—due in the U.S. this month and in Europe by the end of the year—is sending shivers through the mobile industry. MusicStation, though hardly the first mobile music service, looks to be the strongest contender so far to fight off an incursion by Apple into mobile music. Veteran mobile industry analyst Ben Wood of CCS Insight, a tech consultancy in Britain, calls Omnifone's success at pulling together its panoply of industry partners "a real achievement."

Mobile operators are looking to mobile music to drive growth in use of data services and counteract sagging voice revenues. The business is small today: only about $160 million in 2006 including à la carte downloads and subscriptions, according to Screen Digest, a market research company. But it should grow to $1.7 billion in 2011. (By comparison, Internet music downloads are projected to grow from $1.6 billion this year to more than $5.7 billion in 2011.)

Phone-Friendly Subscription Model

What sets MusicStation apart from predecessors are a number of key differences. For one thing, it was designed from the get-go to work across different mobile providers and on handsets from many different vendors, all with the same user interface and set of features. Rather than requiring customers to download songs to PCs and then synch them with their handsets, MusicStation sends tracks over the air directly to phones. And it also includes a significant component of social networking, including the ability to share playlists and tracks with other users over the air. MusicStation users also will get music news, gig dates, single and album releases, and messages from artists based on what music they listen to most frequently.

But perhaps the most radical difference is that MusicStation uses a subscription model rather than pricing on a per-song basis. Customers pay €2.99 (about $4) per week for unlimited access to the company's million-song catalog, but don't purchase rights to own the material. Rather, songs are "rented" for as long as the customer remains a MusicStation subscriber.

While some users may balk at that approach, it has a number of advantages in the mobile sphere. For one thing, if customers lose or replace their phones—or even change to a different operator—they don't lose their playlist because the tunes reside in the network, not in the phone itself. This network-based architecture also lets MusicStation support all manner of different devices, from phones that can hold only a few songs in memory to those that can store thousands.

"It's hard to imagine a more compelling experience on mobile than MusicStation," said Rob Wells, senior vice-president (digital) for Universal Music Group, in a statement.

Lots of Competition Coming

Still, analysts say, even with all its advantages, MusicStation won't have clear sailing. After all, most mobile operators have failed so far to captivate consumers with mobile music offerings, most of which have been too complicated, expensive, and slow. One concern is that most consumers still tend to download music on their PCs and then transfer it to other devices. They also seem to prefer owning, rather than renting music, say analysts. "Rental models have yet to capture the public's imagination," says Dan Cryan, a digital musical analyst at Screen Digest.

There's also plenty of competition aside from iTunes. Earlier this month, digital download pioneer Napster Mobile (NAPS) announced that Swisscom will launch its mobile music service in Switzerland. Britain's Vodafone (VOD) is reportedly testing an over-the-air mobile music service offering from the U.S.'s Groove Mobile. And Nokia acquired digital music provider Loudeye last year to help drive acceptance of mobile tunes.

Market Value

But Omnifone does seem to be hitting the market at the right time. Widespread rollout of third-generation networks and plentiful wireless bandwidth permits songs to be downloaded in seconds rather than minutes. At the same time, mobile operators are coming around to the idea of flat-rate, rather than transactional, pricing for music and other services to drive demand.

And rather than reinvent the wheel, Omnifone has teamed up with established industry players. For instance, instead of negotiating billing relationships with operators on a country by country basis—as Apple will have to do—Omnifone has partnered with Musiwave, the music arm of Openwave Systems (OPWV), which has existing relationships with 35 mobile operators worldwide.

No doubt the music industry welcomes a major new distribution channel for digital music. Operators are happy to have a stronger alternative to iTunes. The outstanding question is whether consumers will take to MusicStation. CCS Insight's Wood thinks the new service has the best shot of any so far at succeeding. Now it's up to the Swedes to cast the first vote.

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