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Mobile entertainment faces issues

As cell phone operators prepare to offer music and video services, they'll need to settle basic business matters.

The cell phone is quickly becoming the Swiss Army knife of electronic gadgets, offering users everything from traditional voice calling to music listening to TV programming.

But before mainstream America starts listening to music and watching TV on cell phones, the industry will have to iron out some critical issues.

Topics surrounding the distribution of music and video on cell phones are sure to be hot at the CTIA Wireless IT & Entertainment 2005 trade show in San Francisco, which officially kicks off on Tuesday. Joining telecommunications and technology giants such as Sprint Nextel, Microsoft, Intel and Nokia are media and entertainment moguls from Warner Music Group, RealNetworks, CBS Broadcasting and Major League Baseball.

The ring tone business has proven to be a lucrative money-maker for cell phone providers, generating $217 million in revenue in 2004, according to JupiterResearch. Wireless operators, content providers and cell phone makers all see huge opportunities in the addition of entertainment content.

"Entertainment is a huge focus for us in our strategy," said Clay Owens, a spokesman for Cingular Wireless, which is jointly owned by BellSouth and SBC Communications. "We see it as a big potential money-maker."

The recently announced Rokr handset from Apple Computer and Motorola, which allows users to download full-length songs from their iTunes libraries, could be a harbinger of bigger things to come in the mobile-music market. But limitations in the new product also highlight business model issues that urgently need to be worked out.

For example, the Rokr can hold only 100 songs, even if the consumer inserts a memory card with more capacity than the 512MB card that ships with the phone. Clearly, this looks to be a limitation imposed by Apple so that the new phone doesn't cannibalize Apple's iPod business.

Another interesting tidbit about the new Rokr is that songs downloaded into it from iTunes can't be used as ring tones. This is hardly surprising, given that Cingular, which provides the cellular phone service for Rokr, wouldn't want to lose out on any of its lucrative ring tone deals.

Users are also able to download songs only from their iTunes library stored on their PC, not directly from the iTunes Web site. This limitation could be a function of two things. First, Cingular hasn't yet completed its 3G network, so the network itself is not equipped to handle downloads of full songs. There's also likely an economic reason for the limitation.

According to a Reuters news report, Cingular is planning to launch a music download service of its own early next year, once it completes a big portion of its 3G network deployment.

Motorola and Apple aren't the only ones with a music-playing phone. All the major cell phone companies have announced mobile phones that will store and play music, largely supporting either MP3 files or Microsoft's Windows Media format. Nokia's N91, Samsung's SGH i300 and Sony's Walkman W800 are examples of handsets that play digital music files. But as of yet, getting music onto the phones has not been easy.

"There are still a lot of business model issues to work out," said Linda Barrabee, an analyst at Yankee Group. "The Rokr model, where songs from iTunes are loaded on a phone, cuts out the cellular provider, and they won't like that."

To combat their exclusion from the iTunes download service, the major cellular operators are already

But music downloads over cellular networks won't be cheap. Some experts predict that they'll be as much as two or three times as expensive as songs downloaded onto PCs. The inflated price can be justified, in part, by the added cost of transmitting data over the cellular network. What's more, with consumers willing to pay $3 or more for ring tones, it seems reasonable that they'd be willing to pay at least that for a full song, analysts say.

"Cell phone carriers have been making a lot of money in ring tones, and they want their due in music, too. But the real issue is about the price point and what consumers will be willing to pay."
--Linda Barrabee, analyst, Yankee Group

But it's not clear that consumers will be willing to pay extra to download their music directly onto their cell phones. According to a recent study by the The NPD Group, more than half the respondents, who said they'd be willing to buy an MP3 phone, said they'd prefer to transfer their music from their PC to their phone. Only 37 percent said they'd prefer to download music directly to their phone over a mobile network.

Those preferring to download music onto their phones said they'd be willing to pay a premium for the songs, but "the optimal price point" for these songs would be about $1.75, compared to the typical 99 cents that people pay for songs on iTunes.

"Cell phone carriers have been making a lot of money in ring tones," Barrabee said, "and they want their due in music, too. But the real issue is about the price point and what consumers will be willing to pay."

Music isn't the only form of entertainment cell phone operators think people are willing to pay for. They're also betting that people will want to watch TV on their mobiles. All three of the major U.S. cell phone operators offer a mobile TV service for between $10 and $20 per month. Verizon Wireless has its V Cast service. And Sprint and Cingular offer a service from start-up MobiTV.

So far, mobile-TV services have not been a big hit with consumers. But experts say the service is still in its early days, and cellular providers are banking on the fact that mobile TV--including movies, news clips, real-time sports and mini soap operas--will turn into a significant money-maker.

Mobile TV does have several challenges to overcome before adoption hits the mainstream. The first is image quality. Cingular's service runs over its older EDGE network, an Internet access service that provides relatively slow download speeds, between 100kbps and 135kbps. Viewing the video clips is more akin to watching a slide show than an actual television program. Once the 3G network is in place, the quality is expected to improve, but even then, it will not be on par with what people are accustomed to viewing in their living rooms.

At least one wireless company is investing big bucks to improve the quality of mobile TV. Qualcomm has invested $800 million to date in a new service it calls MediaFlo.

Essentially, the company is building an end-to-end network that consists of entirely new wireless transmitters and receivers. Qualcomm hopes to eventually sell MediaFlo as a service to wireless operators, who will then offer services directly to consumers. Mobile operators will be able to offer from 15 to 20 channels of broadcast-quality TV.

Another big piece of the mobile TV puzzle has to do with content. Part of the success of these services will depend on the robustness of the content that's offered. Media companies such as the National Football League, NBC Universal and CBS are already developing content specifically for the mobile market. More are expected to come on board.