Cingular: Giving Away the (Music) Store

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"We think that music will help us retain more of the right kind of customers, and that it will encourage them to stick around longer, increasing their value to us over time," Ryan says.

There won't be ads on Cingular's service, at least for now, while the carrier learns more about its new medium. "People regard mobile phones as very personal devices. It's not like broadcast TV. To the extent that you do mobile advertising, you have to make sure you are offering something that people really want," Ryan says.

The most curious aspect of the new service is that Cingular already has a relationship with Apple, selling an iTunes-equipped phone (see BusinessWeek.com, 10/19/05, "Apple's Phone Isn't Ringing Any Chimes"). Ryan says the new service doesn't necessarily conflict with its relationship with Apple, which is itself rumored to be creating an iPod phone (see BusinessWeek,com, 10/21/06, "The Apple iPod Turns Five"). "We already have addressed the iPod market, and now we're addressing the rest of the market," he adds. And that could be huge: Ryan says only about 10% of the market has an iPod or other digital music player.

Hit or Miss

Clearly, Cingular's new music service is no get-rich-quick scheme. And there's no guarantee that it will work, even over the longer term. Internet and tech companies that build sizable audiences often fail to generate much revenue. And bundling music into a package of services is no sure thing, either. Apple, whose business is geared around proprietary standards and a limited array of products, has prospered in recent years. Conversely, Yahoo—which has built its company around open standards and a wider collection of products—has struggled.

Still, there are plenty of examples of Internet companies that have built a huge base of customers and increased revenue later. eBay's (EBAY) Skype is one. Google is another. The lesson? When the strategy works, it works really well.

Rosenbush is a senior writer for BusinessWeek.com in New York.