Cingular: Giving Away the (Music) Store

The cell-phone carrier's new mobile music strategy allows users to download songs to handsets at no charge—but players are a different story

by Steve Rosenbush

Telecom companies are known for developing products around proprietary technology and charging customers a rich premium. That has been true since the dawn of voice mail—or even calling itself. In recent years, wireless companies have relied on proprietary, high-margin services such as text messaging, and arcane wireless data standards to boost profits.

Now, alarmed by the success of Apple's (AAPL) iPod, wireless companies such as Verizon Communications (VZ) and Sprint Nextel (S) have waded into the mobile-music market with proprietary music stores that charge customers as much as $2.50 to download a song over the wireless network. Starting next year, Cingular will allow consumers to download songs over the air at no charge.

The company, which is owned by AT&T (T) and BellSouth (BLS), said Nov. 2 it was launching a new music-playing cell phone that can download songs from PC-based music subscription services such as Real Networks' (RNWK) Rhapsody and Yahoo! (YHOO) Music Unlimited.

New Middlemen

Cingular will allow people to download music to compatible phones for free, although consumers will pay a monthly charge in the range of $15 for the ability to download songs from those services to a portable music player. "Right now, we're focused on getting people to view mobile music as something that's interesting and exciting. You've got to build a base. Once you do that, there are all sorts of ways to drive revenue from it," says Jim Ryan, vice-president of consumer data services at Cingular.

Cingular's music strategy is much closer in nature to those found in the computing industry, where open standards such as instant messaging and the language of the Web hold sway. The idea of giving a service away to build a customer base is standard-operating procedure for Internet companies. Yahoo, Google (GOOG), and countless others have built their businesses that way. And Cingular's strategy of partnering with the music industry is similar to the partnerships found in the Internet world.

Telecom companies tend to build products in-house, functioning as owners or gatekeepers of content. For telecom companies, the goal is to be the primary or sole link to the consumer. Cingular is unusual among telecom companies because it's allowing third parties such as Yahoo and Rhapsody to step between itself and the consumer. "We just think these other companies understand the music business better than we do," Ryan says.

Ad-Free—For Now

It's not clear that the music service, on its own, will be a huge revenue driver for Cingular. But music subscription services will pay Cingular a fee for steering new customers toward them, Ryan says. He declined to disclose financial details of the arrangement. Cingular also expects the music service to drive sales of advanced 3G phones, high-speed data services, and related products, such as XM Satellite Radio (XMSR). Cingular charges $8.99 a month for 25 XM radio stations. It offers streaming music, too (see BusinessWeek,com, 7/28/06, "A Cingular Stones Concert").