Nokia takes a bite out of Apple as the west finally catches up

October 2008


By Cassandra Williams postgraduate student at the College of Law

Two new digital music services have just been announced, each potential threats to the dominance if Apple’s iTunes. Firstly MySpace announced that it would allow artists to stream as many tracks as they like from their MySpace site, funding the costs through advertising, and also announced that it would also compete with iTunes in selling downloads if users wish to keep tracks (on their computers or MP3 players) with a 79p per track offer. All four major labels (Warners, EMI, SonyBMG and Universal) have signed up to the service which will first launch in the US . But this article looks at a different platform – the mobile phone – where a new threat to Apple is perceived. That said, the combination of phone and music player only really took off with the iPhone. 5 million have been sold this quarter according to Information week. However there are drawbacks to Apple’s system: iTunes only offers music on a song by song basis; the tracks are all M4A and thus cannot be easily transferred to other devices; and record label executives are also known to be dissatisfied with the deals they are forced to accept to sell tracks via the itunes site. With these drawbacks, Nokia have stepped up to the challenge, offering a new “Comes With Music” digital music service. Once both the handset and PC are set up, the service gives customers unlimited access to the entire catalogue on the Nokia Music Store, which features more than 2 million tracks from three major labels (Universal Music Group, Sony BMG and Warner Music Group), plus a host of indie labels. Subscribers will be able to download as many songs as they wish to their PCs for one year for free. They are also able to “sideload” the tracks to their Nokia phones. All songs downloaded during the year can be kept indefinitely – so nasty destructive DRM like on other subscription sites which takes away the music once a subscription ends. At the end of the year, users have various options. They can re-subscribe to “Comes With Music” via Nokia Music Store, but they will need an upgraded handset. They can continue purchasing songs a-la-carte via the Nokia Music Store, or they can keep accessing the songs downloaded for free during the one year, but only with the original handset. Although at first it may seem quite risk to expect consumers to upgrade their phone every year the majority of consumers with a contract phone will upgrade their mobile with the renewal of the12 or 18 month contract.

However analysts claim that operators would be unwilling to subsidise the phone to customers as part of a monthly contract as the service will compete directly with their own music offerings. According to Paulo Pescatore at CCS Insight, “You’re not going to get a carrier supporting it when it competes with their own services, so Nokia’s only route to market is going to be through retailers and distributors,” As part of a pay as you go system it may be harder to entice consumers to ‘upgrade’ every 12 months.

At present, the only UK-based unlimited music download service on a mobile phone is Vodafone’s Music Station, which allows customers to download unlimited tracks from the collections of all the major labels for £1.99 a week, or about £100 a year. The major difference between Vodafone’s system and Nokia’s is that you can keep the music downloaded from the Nokia which you can not on the Vodafone model. This feature in Mr Pescatore’s opinion is going to be Nokia’s saving grace. “It definitely has the potential to kill any mobile music service that is out there today.” This doesn’t come without a price; Nokia will be handing over its entire handset profit margin – and more – to the record industry according to media analysts. The Hollywood Reporter reports that Nokia is paying the world’s biggest label, Universal Music Group, $35 per handset to bundle access to the label’s catalogue. Music business insiders expressed astonishment at Nokia’s generosity: it’s seven times what some privately estimated the deal was worth. Paid Content puts the payment to UMG at $33.5 per handset for the first 2.5 million units, falling as volumes increase.

If Nokia succeeds in replicating the deal with other labels then the extent of the programme becomes apparent. According The Register the actual figure including publishing royalties, and the indie sector figure is closer to $150 per handset. That comfortably wipes out any hope of an immediate profit for Nokia on the Comes With Music deal with the average selling price of a mobile handset at around $100 and Nokia’s gross margin around a third of that.

Although Nokia (and Vodafone) are billing the idea of a subscription-based music system for mobiles as being ‘new’, its not – since 2002 U-Music in Korea have offered a service allowing subscribers to download full-track music via both mobile and PCs on a monthly fee basis. Indeed the West has always been slow on the uptake of using Mobile phones as anything other than a phone, but Japan and Korea lead the way in South East Asia which took to immobile music almost instantly. Among various mobile internet services that have emerged (such as paying with your phone like a debit card), music-related services have been most successful in the two countries. In South Korea, which has been plagued by piracy, digital sales have soared and now account for more than 60% of the market. In Japan, full-track downloads to mobile phones now account for 40% of all music sales value (the Guardian).

The battle for dominance in the digital market may be more publicly fought in the UK and US but perhaps we should all be looking to but Japan and Korea to see where the war will be won.

The Times 25 th September 2008 p51

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