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Digital music is going mobile

While the iTunes phone plays a waiting game, cell phone networks are building their own download stores.

For years, wireless companies have watched with envy as Apple Computer's iPod became the best-loved pocket device in America, a role filled virtually everywhere else in the world by the cell phone.

Now, they're getting ready to do something about it.

Led by Verizon Wireless and Sprint Wireless, the big phone carriers are edging toward releasing their own iTunes-like music services, aimed at persuading people to download or listen to music files over new broadband wireless networks. Slated to begin selling music perhaps as early as the end of this year, these services are prompting eager looks by record labels hungry to expand the reach of digital music.

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What's new:
The big phone carriers are edging toward releasing their own iTunes-like music services.

Bottom line:
The planned wireless services could ultimately be the biggest threat to Apple's dominance of the digital music business.

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"We're excited about it, but are cautiously optimistic," said Rio Caraeff, general manager of Universal Music Mobile. "The next six to 12 months will be a healthy time in the market for a lot of experimentation and choice. We don't know exactly what the winning models will be."

The planned wireless services could ultimately be the biggest threat to Apple's dominance of the digital music business since the iTunes online music store opened in 2003.

All the major cell phone companies have now announced cell phones that will store and play music, largely supporting either MP3 files or Microsoft's Windows Media format. In a speech announcing Motorola's new line of products on Monday, Chief Executive Officer Ed Zander spotlighted music as one of the key growth areas for phones.

"Motorola is going to be very big in music in the coming year," Zander said. "We believe that music will be the next big thing."

Yet much will depend on the wireless carriers' early business choices, since they have little experience in the media distribution business. At least in the United States, music is likely to be as much as two or three times as expensive on wireless devices, with a smaller selection available for purchase, compared to services such as iTunes, analysts say.

That extra cost is in part because labels and carriers see phone consumers' willingness to pay $3 or more for ring tones--essentially phone rings customized with snippets of hit songs or other audio files--as evidence that they'll pay more than 99 cents for a full song. Carriers also think consumers may pay more for the convenience of instantly buying a song wherever they are.

"We're still very much in the infancy of wireless music," IDC analyst Susan Kevorkian said. "We expect that carriers offering wireless music stores directly to consumers will be focusing on offering music to people to capitalize on the impulse buy."

Nevertheless, the carriers' plans mark a convergence of interests between the giant mobile phone networks and record labels that could give wireless music legs.

Wireless carriers, particularly those moving to so-called third-generation, or 3G, broadband data networks need to find applications that will persuade customers to sign up for more expensive data plans. Downloading and streaming music has already proved to be a popular use for phones in Europe and Asia, to the point where South Korea's SK Telecom has invested in that country's largest record label.

For their part, record label executives see great potential in expanding digital music sales to the audience of cell phone users, which at more than 170 million in the United States alone dwarfs the number of people who have purchased iPods or any other MP3 players.


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A side benefit, some executives add, is that the mobile market may also expand the market enough to lessen Apple's dominance over the digital music business. The company's power has allowed it to stand in the way of features the record labels want, such as flexible pricing and compatibility between competing services.

"People say Apple dominates the download category, and that raises real issues for music companies and competitors," said one top label executive, who asked not to be named. "They ask how anyone could really change that. Well, I think that the mobile space provides great opportunity for the competitive landscape to be transformed."

A wild card is what Apple itself will do in the mobile space. The company announced an iTunes-enabled phone with Motorola a year ago, but it has yet to be unveiled. At his company's press event Monday, where it was widely expected to be released, Zander said it was still on the way.

"It's real, and it's happening," Zander said, joking that he had "put his foot in his mouth" every time he'd previously predicted that it was ready for market. "Stay tuned for iTunes."

Race to launch
Among over-the-air services, Verizon Wireless, with the most advanced data network, is likely to be first to market in the United States. At a conference hosted by the Yankee Group last month, Chief Executive Officer Dennis Strigl told attendees that his company's music service would be ready in "six to eight months," according to Bloomberg News.

Company spokesman Jeff Nelson said the operator is "working toward offering a mobile music service" but declined to be more specific.

Music industry sources who have been briefed on Sprint's plans say the company is building a branded service that is likely to launch early next year, but will offer access to other companies' services as well. Sprint already has deals to provide mobile music from Sirius Satellite Radio, a start-up called MSpot and Music Choice.

Music industry sources say that services from both Verizon and Sprint are likely to offer customers a way to download music on both cell phones and PCs, so that music can be consumed on a variety of devices.

Cingular, whose 3G infrastructure plans trail Verizon's, isn't expected to launch a service until next year at the earliest.

Surprisingly, Virgin Mobile USA--whose teenage appeal might make it a natural for music services--is sounding the industry's sour note. Virgin executives say downloads to phones still take too long for immediate launch of a service.

"Our customers have always wanted to (consume) music," said Virgin Mobile USA chief Dan Schulman. "But if you were to download a song, and it takes five minutes to do so, it doesn't matter if it costs 10 cents; they are not going to do it."

Far from a sure thing
It may be some time, if ever, before these wireless music services become a direct competitor to iTunes, analysts and even record label executives say. Instead, they may initially serve as a complement to computer-based services.

"They're not mutually exclusive," IDC's Kevorkian said. "We think it's very likely that while there will be a growing percentage of consumers who choose to use (a) phone as (their) primary MP3 player, a large majority will also own a portable MP3 player and use them interchangeably."

Label executives say phones' ability to support instant impulse buying will be attractive even to existing customers of iTunes, Napster and other services. Executives note that most music marketing materials, from radio play to street posters, reach consumers when they're not near their computers.

There are other issues to overcome before carriers can persuade consumers that a cell phone is an adequate substitute for an iPod and iTunes, however.

As with the computer-based services, interoperability will be a key hurdle, analysts say. Even if carriers' services allow downloads to PCs as well as cell phones, it is unlikely that they will offer songs in a format that is directly compatible with all MP3 players. Today, for example, Apple's iTunes sells songs that can be played only on the iPod.

Marketing will also be a key issue. Mobile phone companies have large marketing budgets, but are also launching video-on-demand, wireless messaging and other services. They may be hard pressed to match the consistent, successful marketing campaign that has boosted Apple's iPod and iTunes service.

"I think the verdict is out as to whether they'll put a long-term (marketing) commitment behind these services," Universal Music Mobile's Caraeff said. "It's not just about putting $100 million behind it in one quarter. Just because a device is music-capable doesn't mean customers will know about it."

Indeed, some analysts fear that cell phone companies' rapid expansion into a plethora of data services could shortchange all the new features, including music.

"The real question is, 'What are these guys becoming?'" said Iain Gillott, who heads wireless communications consulting company iGillott Research. "Are they media companies, business solutions companies or cell phone companies? I'm not sure the problem will be marketing muscle, as much as confusion in the market."

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