Nokia's Music Plan: Too Little, Too Late?

Nokia Oyj Chief Executive Officer Olli-Pekka Kallasvuo said this month he's "really bullish" about the company's "Comes With Music" package, a phone bundled with unlimited songs. Analysts say it leaves them cold.

Services like Comes With Music from Nokia (NOK), the world's largest mobile-phone maker, to take on Apple Inc.'s (AAPL) iPhone are too little too late, said Tero Kuittinen, an analyst at Greenwich, Connecticut-based MKM Partners.

"The time to really push for a premium service to compete with Apple was two to four years ago," said Kuittinen, who has a "sell" rating on Nokia. "I give it a year before they close it."

The offering is part of Kallasvuo's push into mobile services, which is aimed at stemming Nokia's market-share declines. With dozens of ways to stream, rip or pirate tracks, the service faces consumers reluctant to pay for music access. Other hurdles include Apple's stronghold on audiophiles with its pay-per-song model, the popularity of streaming services such as Spotify and carriers pushing their own offerings.

Analysts view the service, unveiled about 14 months ago and touted as a strong offering by Kallasvuo at the investor meeting Dec. 2, as a test of Nokia's ability to respond to consumer demand. Nokia's share of the smart-phone market, the industry's fastest-growing segment, fell to 35 percent in the third quarter from 41 percent, while Apple's iPhone gained. Nokia has tumbled 86 percent on the Helsinki stock market since it peaked at 64.88 euros ($95.06) in June 2000.

Crowded Market

Sold in 15 countries, Nokia's Comes With Music has clocked more than 10 million downloads in both Mexico and Brazil, two of its most successful markets. Spokeswoman Arja Suominen declined to provide overall numbers. Apple had 100 million downloads after iTunes had been open for about the same time, and has sold more than 8.5 billion tracks since starting in April 2003.

Espoo, Finland-based Nokia is counting on music, maps, e- mail and media to increase the appeal of its smart phones. In addition to Apple's iPhone, Nokia faces competition in this segment from Research In Motion Ltd.'s (RIMM) BlackBerry, Samsung Electronics Co.'s devices and Motorola Inc. (MOT). Google Inc., (GOOG) the most popular Internet search engine, is also developing a mobile phone that uses its Android operating system, making the market even more crowded.

Nokia is rolling out more phones with bundled services, aiming to get 300 million service users by the end of 2011. As of Dec. 11, it had 79.4 million. Nokia last month began shipping the X6, its first phone sold only with a Comes With Music package. Its next phone with the package will be the 5235, with a suggested price of 145 euros.

Pricing Confusion

"We have received some great user feedback for the service," said Liz Schimel, head of global music at Nokia. "We take a long-term view of Comes With Music rather than seeing it as a short-term promotion."

Nokia says downloading the top 100 albums on Apple's iTunes would cost 934 euros plus the cost of the device, compared with an all-inclusive 450 euros for the X6.

Still, the high upfront cost and the confusing array of Nokia's packages have turned consumers away, analysts said. Comes With Music is available from 25 carriers on more than 20 devices. The price of the music is rolled into the handset price or monthly bills, making it difficult to see how much the music really costs. Also, the unlimited downloads end after 12 to 24 months, although users can keep the tracks on their devices.

"It's a complicated message to send to consumers," said Paul Brindley, chief executive officer of Music Ally in London, which researches the digital music industry. "Buying access to the service is quite complex and quite hard to understand."

'A Disaster'

Nokia undermined the service in its first year with poor handsets and confusing marketing, said Ben Wood, an analyst with market researcher CCS Insight. Advertising for the service was "colorful but oblique," he said, adding that Nokia should have shown someone buying a truckload of CDs for next to nothing.

Nokia also stumbled in requiring customers to buy specific handsets to get the unlimited music downloads, analysts said.

"It's been nothing short of a disaster," said Steve Mayall, a director at Music Ally. "It was poorly executed and there was also a general level of disbelief of having unlimited music on a handset for one price."

Universal Music Chief Executive Officer Doug Morris said while building the cost of music into the product is a good idea, Nokia may not have been as good as Apple with the device.

Carrier Competition

"Proper hardware and interface are what users want to pay for," said Thomas Langer, an analyst with WestLB who says Nokia's high-end product portfolio is still disappointing. "You can get music at Wal-Mart or Amazon."

Nokia's music service was trumpeted in May by France Telecom SA's (FTE) Orange unit. Seven months later, Orange isn't advertising Comes With Music on its Web site. It's selling its own streaming music and video packages, and gives away 10 hours a month of free listening with prepaid top-ups.

"People haven't been willing to pay for music," said Yves Maitre, Orange's chief of devices and multimedia. "Customers want music as part of an entertainment package including TV and videos, and they want transparency about what they are paying."

Vodafone Group Plc's (VOD) 360 suite duplicates most of Nokia's service offerings including music. Specialized music phones and bundles have had their day, said Patrick Chomet, Vodafone's devices chief.

Consumer Behavior

"Music is becoming something like what the camera has been," said Chomet, whose company doesn't offer Comes With Music. "People expect a mid-tier to high-end mobile phone to have it."

As much as 95 percent of digital music downloads are illegal copies, according to the London-based International Federation of the Phonographic Industry.

"Research with young people in 10 countries showed virtually none of them were willing to pay for music," said Stephanie Baghdassarian, a Gartner Inc. (IT) analyst in Paris. Kids copy music from CDs and the Internet just as adults do, they share tracks from mobile-to-mobile using Bluetooth, she said.

When they do pay for music, they prefer to stick with the Apple model.

"If people are really interested in music they'll probably choose an iPhone or a separate Apple device for the purpose," said Michael Schroeder, an analyst at FIM Bank in Helsinki with a "reduce" rating on Nokia shares. "Apple attracts a kind of user that's ready to pay a bit more for the phone and a bit more for applications. The average Nokia user is looking for the last dime."