Cell phones take iPod challenge

When Gilles Babinet looks at a cell phone, he sees a music store, an iPod and even a nascent platform for a tiny-screened MTV.

The curly-haired Parisian is the chairman and founder of Musiwave, the company that powers Vodafone's new mobile phone music download service, which launched across Europe this week. He's sure that huge numbers of people will eventually find it natural to buy and listen to music on cell phones--but in some countries more than others.

"In Europe, phones are probably the only effort that can really compete with iTunes," Babinet said, noting that more Europeans are likely to adopt music on cell phones than they are to buy songs from Apple Computer's download service. "The attraction for customers in the United States may be less, because iTunes is so much more developed."

The potential of mobile devices as a music delivery platform is clear. There are hundreds of millions of cell phone owners, particularly in European countries, where penetration rates can be as much 80 percent of the population. That pool represents a vastly larger potential market than the millions of people who use iPods or other MP3 players.

But companies that sell content for mobile devices face different marketing and technological challenges compared with businesses that deliver PC-based online services. Some now see the markets as distinct rather than competitive. That's raising the specter of two kinds of service, with separate pricing models and possible walls that would prevent music purchased on cell phones from being transferred to a PC, and vice versa.

Different strokes
Vodafone, the world's largest mobile phone company and a trendsetter, is aiming to bridge that gap with its splashy new European service. Contradictorily, the service is also a sign of a split--it underlines the growing divergence in the way Americans use technology to find and listen to music compared with the way people in Europe and Asia do.

The U.S. market remains dominated by computer-based services and by devices such as the iPod and its related iTunes service. A handful of music services for cell phones have been launched, but these largely involve downloading music to a PC and then transferring it to a phone.

In Europe and Asia, cellular carriers and record labels are thinking more ambitiously. They see the latest generation of Internet-connected, multimedia phones as the natural extension of Sony's Walkman--devices that will be vastly more common than the iPod and able to make it easy to impulse-buy music at any time.

The idea is still young. Music for cell phones is relatively expensive and scarce--just 3,000 songs are available through Vodafone's music download store, although the company promises that will rise to 50,000 in just a few months.

Formats, too, are in flux. Vodafone offers full versions of songs. In contrast, German carrier T-Mobile sells re-edited, two-minute versions of songs that are faster to download. In addition, record labels in Europe distribute albums on memory cards that can be slotted directly into phones--most notably, the recent EMI promotion of Robbie Williams' newest album.

Phone carriers, particularly in Europe, see the music and upcoming music video services as a way to attract people to their new third-generation, or 3G, networks that can deliver broadband access to cell phones. Collectively, European carriers have spent more than $100 billion on purchasing the wireless spectrum needed to offer broadband service, and they're desperate to make that money back.

On the content side, sales of ring tones indicate that the mobile market is already a gold mine. Research company Strategy Analytics esti-

mates that $4.1 billion was spent worldwide last year on ring tones and ring tunes, which are snippets of music that people use to replace phone rings. The record industry has taken note.

"All the labels are very focused on the mobile space," Scott Hochgesang, executive vice president of the Universal Music Group, said at a recent conference in San Francisco. "We may have been a bit slow to things happening on the Internet, but we won't do that again."

Beyond the tones
Getting the pricing right for music on cell phones can be a headache. Vodafone charges about $2.75 for each song, and in Japan, carrier KDDI plans to launch a service this month that will offer wirelessly downloadable songs for between $2 and $3. That compares with the 99-cent price per song at Apple's iTunes and other PC-based download stores. In addition, the cost of downloaded tunes is easily comparable to the cost of buying a CD.

Labels are loath to price cell phone songs at much less, though. And people have been paying $2 to $3 apiece for ring tones and ring tunes without considerable protest, in part because there is nothing to compare them with off the phone.

Network capacity is also an issue. According to Musiwave's Babinet, the new Vodafone service compresses music in the AACPlus format, which creates files far smaller than an equivalent-sounding MP3 file. On a true 3G network, this can start playing after about five seconds, or about 15 seconds on the slower broadband networks used by American companies offering cell phone data services.

For the most part, European and Asian carriers are further ahead in moving to networks with true 3G capacity. U.S. carriers are slowly upgrading their networks, and new projects, such as a Qualcomm-sponsored 3G content network geared to video and music, are also under way.

Digital rights management is another concern. Record labels hope to avoid the trading of mobile downloads between phones or over PC-based peer-to-peer networks.

An early version of a standard for managing digital rights was created by the Open Mobile Alliance (OMA) industry group, but a second, stronger version is now gaining some popularity. Some labels eager to dip their toes in the music download waters are turning to proprietary rights management software that isn't compatible with OMA standards.

"There are a tremendous number of digital rights management issues that remain," said Thomas Gewecke, senior vice president of business development at Sony Music.

In the United States, some labels point to the lack of phones that can handle full music as the hold-up in the cell phone market. Some appropriate devices from Motorola and other companies have come to market in recent months, but they remain rare, and they often have little storage capacity.

Growing consumer awareness of music could make the feature as popular as cameras on cell phones and could break the logjam soon, enabling the United States to move more quickly along Europe's path, some labels predict.

"I think this may well be a year when consumers demand what they're not getting," EMI Group spokeswoman Jeanne Meyer said.