Nokia Corp. is buying its way onto the mobile music playground, agreeing to acquire distributor Loudeye Corp. for $60 million. But the key to success in mobile music still lies in the devices.
The world’s largest manufacturer of mobile phones said last week it will pay $4.50 per share in cash to Loudeye shareholders, which operates 60 digital music services in more than 20 countries. The price marks a premium of more than 150 percent above the shares’ closing price hours before the deal was announced.
Nokia looks to square off against Apple Computer Inc.’s iTunes and may choose to take on fellow mobile players including Verizon Wireless, Sprint Nextel Corp. and a handful of mobile virtual network operators. The company said it will deliver a “comprehensive music experience”-a phrase uncannily similar to Verizon Wireless’ boast of having “the world’s most comprehensive music service”-as well as devices and applications to support the offering.
Loudeye, which claims 130 employees, made substantial headway in Europe several years ago with online music distribution service OD2. And while the company has continued to gain traction in other markets, including South America, Australia and South Africa, its European business has faltered recently, losing clients including Virgin Mobile Group and Coca-Cola to competing distributors.
The Seattle-based firm suffered a net loss of $33.4 million in 2005, and last week reported a second-quarter net loss of $3.5 million. Loudeye jettisoned its U.S. business earlier this year in an effort to cut costs and streamline its operations.
The deal, which is scheduled to close in the fourth quarter, not only will give Loudeye a high-profile partner with deep pockets, it will allow Nokia to leverage its position as a top manufacturer of music-enabled phones. Nokia sold 15 million such devices in the second quarter, nearly doubling the 8.1 million iPods sold during the same period.
“We think this bolt-on makes sense,” UBS Investment Research opined, “given Nokia is now the largest manufacturer of digital music player devices, which are becoming increasingly pervasive, as well as the trend toward higher software content in mobile devices. Further, the acquisition gives Nokia a foothold in another part of the food chain (i.e. content delivery), which we believe will be critical long-term.”
Indeed, market research firms forecast a booming market for mobile music in coming years. Juniper Research earlier this month predicted mobile music revenues will top $14 billion by 2011 as full-track downloads begin to displace ringtones and other personalization applications as a prime moneymaker. And that trend is already being fueled by multimedia-friendly phones that are gaining market share, according to the NPD Group.
“Sales of mobile phones that are capable of downloading, storing and playing back full music tracks are on the rise,” according to Neil Strother, NPD’s research director of mobile devices. “In unit volumes, music-enabled phone sales increased from just under 2 million to just over 3 million-a 100 percent increase in one year.”
Most analysts agree that while iPod sales will likely remain strong-at least for the next few years-many consumers will want a converged device that serves both as a phone and as a digital music player. Like Apple, which drives demand for its iPod through its iTunes store front, Nokia is looking to sell more gadgets by luring consumers to its coming distribution channels. The company may choose to offer its own, Nokia-branded service, or could maintain Loudeye’s tack and bring a “white label” service to market, which operators could brand as their own.
But while offerings from Sprint Nextel and Verizon Wireless appear to be gaining traction, mobile music has substantial hurdles ahead. Most music-friendly phones have failed to impress analysts or consumers: Motorola Inc.’s first Rokr, an iTunes-capable phone sold by Cingular Wireless L.L.C., received tepid reviews for its limited memory, and Verizon Wireless’ new Chocolate phone from LG Electronics Co. Ltd. has already been slammed by critics. Indeed, some analysts have said Nokia will need to invest heavily in software and anti-piracy technology if it is to gain space on the playground.
Any Nokia-branded effort would surely raise the ire of operators, which are desperately looking to full-track downloads to shore up sagging revenues from voice services. The manufacturer surely hasn’t forgotten the lessons learned from its Club Nokia mobile content business, however. Nokia was forced to shut down the portal in response to pressure from carriers, which viewed the business as competition.
The biggest obstacle in the mobile music space continues to be the business model, however. Analysts believe Apple makes less than a dime per song from iTunes, which serves almost as a loss leader for the company’s lucrative hardware business. But the company has effectively set the market for pay-per-song services at $1 per tune-a price wireless companies are loathe to match for over-the-air downloads. Sprint Nextel offers songs at the nearly prohibitive price of $2.50 each regardless of platform, while Verizon Wireless sells $2 over-the-air downloads and $1 tunes to subscribers using a PC.
Amp’d Mobile Inc., which is the lone wireless service provider to match Apple’s price for its over-the-air offering, is believed to lose money on every download. So while Nokia may be looking to market wireless music offerings that will drive demand for its devices, the company will benefit only if it can create affordable, functional phones with a user-friendly interface for music lovers.
“I hope Nokia doesn’t obsess over over-the-air downloads, and instead builds a slick system for incorporating existing MP3 collections,” Card wrote on Jupiter’s analyst blog. “That’s the story of Apple’s success, and will be key to any music phone story as well.” RCR
