Nokia Comes with Music must come with operators

Nokia's Comes With Music, launched last week in the UK, offers a mobile phone with a year's free unlimited subscription to the CwM store. At the end of the contract, consumers can keep all the downloaded music, continue the service if they upgrade their phone, or buy à la carte from the Nokia Music Store.

Nokia has been bullish with its launch of CwM. Although its target audience of young music enthusiasts rely on operator-subsidized handsets, don't have credit cards and can't afford over-the-air downloads without flat-rate data plans, Nokia is not waiting for operator support on the ground.

Perhaps Nokia surmises that it is this very bullishness that will push the operators into supporting a music service in direct competition with their own!

Nokia's new music service may eventually be seen by consumers as an exciting revolution that lowers the cost of exploring and discovering a sizeable choice of music, but risks being seen by operators as a disruption to business as usual with their most important handset provider.

CwM phones will be offered at a premium that is shared with the music labels. However, if operators have to absorb or heavily subsidize the phones it will cost them dearly; if not the cost will be dropped in the laps of credit-strapped youngsters.

Nokia emphasises that CwM has value and is not free, and as such generates income for artists and the music industry. The business model pays out a share of handset sales to labels and artists that is in proportion to that of downloads, plus limited supplementary payments over certain download levels.

This protects Nokia's margins from bored teens with too much time and a spare terabyte or two, but not from the bandwidth charges that a highly successful CwM service could create. That said, Liz Schimel, Nokias's Head of Music Services and Software, is confident that the CwM service will make a profit for Nokia and the labels.

At launch three Nokia phones will come with music: the new Nokia 5800 XpressMusic, the Nokia N95 8GB and the Nokia 5310 XpressMusic. The 5800 will be the flagship device for the CwM service and will be available in the fourth quarter of 2008 at a cost of €279 (before subsidies); however, its initial launch will be limited to seven countries: Spain, Russia, Indonesia, Hong Kong, India, Taiwan and the United Arab Emirates.

Nokia intends the 5800 to be a global phone, and other territories will follow shortly including major European markets. The time lag to get the phone launched in other European markets is due to the time taken to produce operator variants for the device, hinting that mobile operators will be offering the CwM service to their customers.

For a mid-tier non-N-Series device, the 5800 is well specified. Aside from the 640×360 touch screen, which is enabled through a new release of the S60 platform, some of its highlights include: HSDPA, WLAN, A-GPS, Bluetooth, 3.2 megapixel auto-focus camera with dual-LED flash, stereo surround sound speakers, TV out, an accelerometer, proximity sensor and haptic feedback.

This feature set represents great value for money for the consumer at a little over half the price of the Apple iPhone 3G (before operator subsidies).

 

Moreover, if the CwM proposition remains at the £129.95 ($330) price point when bundled with the 5800 then for a little over the price of an iPod Nano the consumer gets a music player, a 3G phone and unlimited music for a year.

Nokia's use of its S60 platform to power the 5800, together with its mass-market positioning, is an attempt by Nokia to motivate a greater number of developers to build third-party applications and services for its devices.

S60 5th edition is compatible with the previous S60 3rd edition; this gives developers an addressable market of approximately 60 million devices. Despite this significant installed base of S60 devices, Nokia has yet to leverage its full potential.

There have been approximately 6,000 applications written for S60 since its first release back in 2001. This can be compared directly to 3,000 applications written for the iPhone 3G and iPod Touch (with over 10 million downloads) since its launch in July of this year. Apple has achieved significant developer momentum for the iPhone in a short period of time, and this momentum is driving both demand and revenues for Apple.

The 5800 and other mass-market devices, together with its recently announced strategy to provide S60 on an open source basis through the Symbian Foundation, should help Nokia achieve greater developer momentum for its platform.

Adam Leach  & Mark Little, Analysts

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