Global Economics

Omnifone Offers Operators a New Tune


The British startup introduces MusicStation Max, all-inclusive download service that will rack up plenty of minutes for mobile networks

Facing the music hasn't been much fun for the world's mobile operators. They were looking to mobile music to drive growth in the use of data services and counteract sagging voice revenues. But first, Apple (AAPL) upset the apple cart by permitting songs to be downloaded easily from PCs to portable devices on both the iPod and the iPhone, circumventing the mobile broadband networks operators nearly went broke building. Then, in December, Nokia (NOK) announced that later this year high-end Nokia phones will come with a built-in service offering unlimited downloads of songs for a year (BusinessWeek.com, 12/4/07), changing the rules of engagement with mobile operators and throwing the market into further disarray.

Now a British startup is offering mobile operators and Nokia rivals a way of fighting back by providing unlimited music over handsets while encouraging the traffic to stay on third-generation (3G) mobile networks. On Feb. 12 at the Mobile World Congress in Barcelona, Omnifone, a British startup formed in 2003, which launched an "anti-iTunes" service last June with operator partners (BusinessWeek.com, 6/13/07), announced it is adding hardware to the formula, with prelicensed music phones. Korean giant LG Electronics is the first manufacturer to sign up for Omnifone's MusicStation Max program, with the first LG touch-screen 3G MusicStation Max handsets due to be released in the first half of 2008.

Goosing Flagging Mobile Revenues

"MusicStation Max gives LG the opportunity to deliver a handset that can download unlimited amounts of music, direct-to-mobile, over the mobile data network," said Dominique Oh, vice-president of LG Electronics Mobile Communications, in a statement. "It reinforces our strategy to deliver handsets that deliver higher subscriber revenues and average revenue per user to our operator partners."

LG's move underscores how music will take center stage in the mobile sector in 2008 and will "be a key driver in pushing handset manufacturers into more service-oriented businesses," says Paulo Pescatore, director of operator strategy and applications at CCS InSight, a mobile consultancy. Such services will give the carriers a way to increase average revenue per users.

Universal Music (VIV.PA), which has backed Nokia's "Comes With Music" offering, said on Feb. 12 that it has also struck international licensing deals with MusicStation Max. Other international music labels are expected to follow. MusicStation Max handsets will be prelicensed, meaning consumers won't have to pay for music but simply sign up for a special music, voice, and data plan, which will let them download unlimited amounts of music, direct to their device, over the mobile network, for 12 to 18 months. At the end of this initial period, MusicStation Max users will be able to migrate to their next MusicStation Max device and continue unlimited music downloads, or alternatively, keep playing their favorite tracks on their current phone for no extra charge.

Gold Rush for the Mobile Platform

Omnifone says it aims to sign up additional handset partners, offering them a cost-effective way to enter the services business in competition with rival Nokia. Its entry into the market means operators won't be forced to choose between splitting revenues with Apple or Nokia, or worse, see their networks circumvented entirely. At the same time, MusicStation Max and Comes With Music are compelling ways for the record labels to earn more revenue from mobile music without being too dependent on Apple.

"MusicStation Max represents the next generation in music mobiles, where unlimited music comes out of the box, with the handset," said Rob Wells, senior vice-president for digital at Universal Music International, in a statement. "It provides a groundbreaking way for Universal Music to monetize its entire music catalogue on mobile."

Omnifone's MusicStation Max is the latest entrant into what amounts to a gold rush for the mobile platform as legitimate digital music sales on PCs remain relatively modest—failing to counter declining CD sales. Apple and Nokia are seeking to blur the boundaries between mobile and PC digital music with platform-agnostic services that compete directly with existing operator offerings. But "Omnifone's service reinforces the distinction," between pure mobile-oriented music services and blended models, says Mark Mulligan, an analyst at consultancy Jupiter Research.

Indeed, Omnifone is hoping to position itself as a far more operator-friendly alternative to Nokia's service (which is part of a broader consumer strategy called Ovi). Omnifone stresses over-the-air delivery, rather than direct-to-PC, as a differentiator to operators. "There is clearly a demand for an operator-centric approach," says Rob Lewis, Omnifone's chief executive.

A Balancing Act with Nokia

But Nokia has already convinced three large operators—Telefónica (TEF), Vodafone (VOD), and Telecom Italia (TI)—to be Ovi partners. And Omnifone's mere presence in the marketplace could persuade Nokia to enter into even more inclusive relationships with operators, says Jupiter's Mulligan. That's a risk, because Omnifone also counts Nokia—which has agreed to bundle the startup's software on its N95 phone—among its customers. If Omnifone's strategy alienates the Finns, the company could find itself sidelined in future models from Nokia, which commands 40% of global market share in handsets.

Jupiter's Mulligan says he sees the entry of MusicStation Max and Comes With Music as positive, with the long-term potential to drive mainstream adoption beyond paid digital music's current niche: Just 6% of European Internet users now buy online, and only 12% listen to music on their mobile phones.

In the near term, though, analysts warn that things will get messy for consumers. Handsets could offer seven or more different ways to get music, which could confuse and potentially turn off mobile users.


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