What does the world's biggest wireless phone manufacturer want with a tiny Seattle company involved in the online music business?
That's the question many asked as Nokia (NOK), the Finnish cell phone giant, ponied up $60 million to acquire Loudeye (LOUD), the $27 million (2005 sales) outfit focused on helping companies sell music downloads. The deal kicked off a flurry of speculation that the world's largest cell phone maker might be plotting its own branded wireless music service.
COLLISION COURSE. But while a Nokia-branded service, competing with wireless service providers' offerings, is a possibility, chances are that's not Nokia's plan. Instead, the company may be seeking to go after none other than the 800-pound gorilla of the digital music world, Apple Computer (AAPL). "It's Nokia's response to iTunes," says Lewis Ward, an analyst with consultancy IDC.
The two giants are gearing up for a battle over who gets to serve as wireless carriers' vendor of choice for music download services, a $400 million market last year that is expected to take off and reach $14 billion by 2011, according to U.K.-based Juniper Research.
A struggle between them would certainly be an interesting match-up. Apple sold 22.5 million iPod players in its fiscal year 2005 and could approach 50 million units by the end of 2006. But Nokia moved 265 million units in its most recent fiscal year, 40 million of which were capable of playing music. "Nokia already sells as many music phones as Apple sells iPods," says Albert Lin, an analyst with American Technology Research. "And the market for music phones will be larger than the market for stand-alone music players. The bulk of music-playing devices sold is likely to be the cell phones." That has to put Apple and Nokia on a collision course.
BIG CATALOGUE. The two giants have been converging on this market for the past two years. Last year, Apple had shown its interest in taking iTunes into the mobile segment by teaming up on the ROKR phone with Motorola (MOT) and the U.S.'s largest wireless carrier, Cingular, a joint venture between BellSouth (BLS) and AT&T (T). Analysts believe Steve Jobs & Co. are in discussions with many global carriers to enable over-the-air iTunes use. The company is also widely rumored to be designing an iTunes-ready wireless phone of its own. As usual, Apple is officially silent on its intentions, but executives have recently dropped hints that it is not sitting still in the music business.
Nokia hasn't stood still, either. Two years ago, the Finnish wireless phone concern began collaborating with Loudeye on creating music stores for wireless operators. Last October, O2 Germany launched its music store, the first wireless music store based on Nokia's and Loudeye's technology. Still, the joint effort didn't gain as much traction as Nokia expected, analysts speculate.
Lately, Nokia has also made a huge marketing push for its NSeries phones, like the N91, music-capable multimedia smart phones. "Music is a very hot area at the moment, but so far, we've only taken the first few steps," says Ilkka Raiskinen, vice-president of multimedia experiences at Nokia. "If this deal goes through, we will be able to work on improving the ease-of-use and bring the openness of the Internet to mobile music."
Translation: Thanks to the Loudeye acquisition, Nokia might have the technology and content components it needs to effectively compete with iTunes. After all, Loudeye has a catalogue of 1.6 million tracks and has more content rights to local music globally than any other music distributor in the world—including iTunes. "No one is close to that," says Murray Arenson, an analyst with Ferris, Baker, Watts. And Nokia's ownership could, potentially, make more music execs willing to work with Loudeye. "In digital music, it's all about intellectual property rights," says Jari Honko, an equity analyst with eQBank in Helsinki. "Nokia has greater power than smaller companies to protect [them]."
MANY ADVANTAGES. Meanwhile, Loudeye's technology know-how will also allow Nokia to compete with the iTunes directly. After all, Loudeye has long been working with Microsoft (MSFT), whose MSN Music Store in Europe is a Loudeye customer, on enabling simultaneous downloads of music to both mobile phones and PCs. Other customers operating online music stores in more than 20 countries with Loudeye's help are Deutsche Telekom (DT) and Cocal-Cola (KO).
After Loudeye becomes part of Nokia, the handset vendor will be able to put more marketing muscle into the effort. "A company like Nokia brings a tremendous amount of validity to what we are doing," says Mike Brochu, Loudeye's CEO.
And while Apple is building relationships with wireless service providers, Nokia already has solid relationships with practically every wireless provider on the planet, giving it an important edge. "With Nokia, it offers opportunities for co-marketing and offers an end-to-end proposition," says James Parton, head of music and moving pictures in product marketing at O2.
TASTY BITE. Yet the Loudeye brand is virtually unknown when compared with that of Apple's hugely popular iTunes service. This gives carriers the chance to market their own brand instead, says P.J. McNealy, an analyst with American Technology Research.
Key to Nokia's success will be allaying carriers' fears that the handset maker will try to compete with them by offering its own branded music download service. Such a service is not out of the realm of possibility: Already, Nokia tried selling ringtones, games, and other services through its own portal, Club Nokia. In response to carrier complaints, Nokia eventually stopped selling software via Club Nokia and converted the site into a customer community and service hub. If Nokia offered its own music service, "the carriers could react extraordinarily negatively," says Andrew Cole, an analyst at consultancy TNMG-Adventis. "They could lose revenues because of this."
Chances are, though, Nokia has learned from the Club Nokia fiasco. Near term, it likely wants a bite of Apple instead.
Kharif is a reporter with BusinessWeek.com in Portland, Ore.
With reporting from Mark Scott in London and Andy Reinhardt in Paris
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