Nokia Upends Mobile Music Market

Implications: Nokia’s move represents a paradigm shift in the mobile music market, and potentially in the overall market. This may represent the beginning of the end for pay services such as Apple’s iTunes, and could be an entirely new way of acquiring music. Good-bye, CDs?

Analysis: The last few years have seen much angst and rhetoric from the record labels as CD sales languished. The usual target has been online music piracy. The meteoric rise of Napster showed the potential of online music, especially if it is free. The slightly less meteoric, but still impressive growth of Apple’s iTunes has validated the online business model and generated considerable cash for Apple. Microsoft and others have launched businesses offering online music for pay. Throughout all this online piracy has continued, although the impact piracy has had on music sales is debatable. The record labels believe it is costing billions, whereas many consumers claim they won’t buy the music anyhow without listening to it first, so it actually isn’t costing the labels anything.

The major carriers, such as AT&T and Verizon, are desperately trying to upscale their mobile business from providing a data pipe to providing content. Margins in the data pipe business are very low, while margins in the content business are much higher. Apple’s success with iTunes provides a model that the carriers would love to emulate, although their success to date has been rather limited. Openwave’s purchase of Musiwave a couple of years ago was aimed directly at this goal, so that Openwave could become a content provider. The failure of that strategy was clear recently when Openwave sold the Musiwave business to Microsoft at less than half the original purchase price. This set of transactions demonstrates that succeeding in the online content business is not easy, yet major players (e.g., Microsoft) still believe it is possible.

In the middle of all this, Nokia just dropped a bombshell. Not only will they provide unlimited free music downloads for a year, but the consumers will be able to retain that music, transfer it to a PC, and presumably burn it to CD from there. In short, the consumer will really own the music, just as if they had bought it on CD. This is in contrast to the difficulties consumers have today retaining music after they’ve legally downloaded it.

If Nokia is able to make this stick, and given their size and market position they likely can, it will have a huge impact on handset manufacturers, online music services, record labels and carriers. It should also go a long way toward stopping music piracy. There is little point in downloading pirated music when it’s available legally for the same price, or nearly so. The only price is buying a Nokia phone, and judging from Nokia’s market share today, consumers don’t seem to consider that a major issue. It’s difficult to see how today’s paid online music services can continue to grow in the face of this competition. Carriers lose any chance of being able to upgrade from pipe providers to content providers, although they may be able to work some kind of deal with Nokia (or others) to get a share of the revenue.

Ironically, this is the perfect solution for record labels, as long as they’re willing to settle for presumably reduced revenues. It seems inevitable that other handset manufacturers, carriers and possibly music services will have to start offering some version of unlimited free music. The clear winner in all this is the consumer. Nokia should do very well for the short term, until others match their offering. Today’s music services seem destined for pain.

It seems overall an elegant solution to today’s issues around music distribution.