Tuesday, April 19, 2005

Mobile phones that rock, jam, thunder, and swing are on the way. Wireless operators around the globe are working with music studios, phone makers, and [musical] artists in a sweeping effort to turn the mobile phone into a go-anywhere digital jukebox.

Foreign carriers such as Vodafone and SK Telecom are leading the way, and US wireless players are following fast. BusinessWeek has learned that Verizon Wireless, Sprint, and Cingular Wireless are expected to unveil services for downloading music directly to wireless phones later this year.

"The iPod is great," says Frank Nuovo, chief designer for Nokia, the world's largest handset maker. "But no one has a stranglehold. There's nothing that keeps the mobile phone from moving into that area."

The telecom approach has several strengths Apple can't match. For starters, a quarter of the world's population already has a mobile phone. That's 1.4 billion people, compared with 10 million iPods sold to date. Most of those cell-phone toters pay a monthly phone bill, making it a snap to add a music charge. Perhaps most important, wireless technology could provide access anytime, anywhere to millions of songs. "You don't have to be a genius to see that the phone will be your own portable stereo that's with you wherever you go," says Jordan Schur, co-president of Geffen Records, whose artists include Snoop Dogg and Garbage.

Apple has had a rough start in working with wireless operators. Most major wireless companies, including Verizon Wireless and Sprint, have balked at carrying the iPod phone. That's a serious impediment because the operators essentially control distribution by subsidizing phones. Why the resistance? Operators want customers to download songs over the air, directly to handsets. But with the iPod phone, customers would download songs to a PC and then copy them to the phone.

The wireless companies may have one advantage if they compete against iTunes on price. Because they already bill mobile customers each month, they wouldn't have to pay credit-card charges to Visa or MasterCard. That's not much of an edge over iTunes when customers buy a $9.99 album. But if they buy single songs for 99 cents at iTunes, the fees total a significant 17 cents to 20 cents. Bottom line: Verizon, Cingular, and Sprint could end up lowering their prices to $1 a song and still make more profit than Apple does. Add it up, and Apple is facing what looks like the most serious threat so far to its digital music dominance.

Research firm Strategy Analytics estimates that in 2008 half of the 860 million cell phones sold will be able to store and play songs, up from 8% today.

Wireless operators have seen what a gold mine music can be. Ringtones, the snippets of songs you can put on your phone to customize your ring, have become a huge hit. Operators charge customers $1 to $3 per download for a few bars of a song and keep most of that for themselves. Ringtone revenues have hit $5.8 billion, and that's expected to reach $9.4 billion in 2008.

Music on phones is coming of age. Watch out, Apple.