December 14 2007: 6:20 PM EST
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Mobile makers shake up music biz

Nokia and Sony Ericsson threaten cellular carriers with their new music plans.

Field Test: Musical cellphones Field Test: Musical cellphones Field Test: Musical cellphones
You don't have to spring for an iPhone to stuff a stocking with a cellphone that can carry a tune. Stores are filled with affordable mobile phones that have access to a growing library of digital music.

NEW YORK (Fortune Magazine) -- Mobile operators are losing their grip on the mobile-music business. The latest threats: a planned free service from handset vendor Nokia and a new music-downloading service from rival Sony Ericsson that will launch next spring.

Sony Ericsson plans to offer more than one million full-track songs that users can download straight to their phones or PCs with a service called PlayNow. It's a gutsy move, because PlayNow undermines Sony Ericsson's best customers, mobile carriers like Orange and Vodafone that buy hundreds of millions of phones.

In the traditional cellular business, it's the carriers, not the handset vendors, that sell services like music. Just two months earlier, the announcement by Nokia, the world's largest handset maker, that it was launching its own music service triggered a flap with Orange. The operator refused to stock offending Nokia phones that included links to the music site.

"This is a larger step than what we've taken before."

Sony Ericsson, the No. 4 handset maker, has dabbled in services since 2004, offering games, ringtones, and a few songs from sister record label Sony BMG (SNE). But as Sony Ericsson head of content development Martin Blomkvist says, "This is a larger step than what we've taken before."

The enhanced PlayNow - pricing hasn't been announced - not only taps into a full catalog of songs from all four major record labels but also works across a range of phone, gadget, and PC brands. It echoes a declaration of change by Nokia CEO Olli-Pekka Kallasvuo, who said in August, when introducing Nokia's service, "This world does not work the way the old world worked."

Sony Ericsson and Nokia are blowing caution to the wind - and a raspberry at carriers - because they have little choice. Apple (AAPL, Fortune 500) invaded their turf by bringing the popular iPhone to Europe in November, along with a business model that sucks music users away from carriers and onto Apple's iTunes service. If the handset makers want to compete against the iPhone, it would help if they had their own music services. That's especially true considering that most mobile music in Europe and the U.S. lands on phones via sideloading (transferring tunes from PCs to handsets).

With that in mind, Nokia (NOK) announced in early December that it plans to sell some phones at a premium that would let consumers download millions of free songs for a year from the Nokia Music Store.

"What consumers are being offered today... is boring, banal and basic."

Universal Music has already agreed to make its catalog available to Nokia for an undisclosed fee, and other record labels, frustrated with carriers' mobile-music downloading sites, are likely to follow. "The sad truth is that most of what consumers are being offered today on the mobile platform is boring, banal, and basic," Warner Music (TWX, Fortune 500) boss Edgar Bronfman said at a conference in Macau in November. He noted that fewer than 10% of mobile-phone customers use phones to buy music, and fewer than 1% use them to purchase anything other than ringtones.

The carriers are still talking tough about holding onto the services business. "We do at the moment own the relationship with the customer," says Vodafone senior content-development manager Neil Walker. But they're also experimenting with opening up. On the same day Sony Ericsson (ERIC) announced its service, Vodafone said it will start selling phones that link to Nokia's music site, as have O2 in Britain and TIM in Italy. That mimics moves by France's Orange and Germany's T-Mobile to stock the iPhone, which sends music users to iTunes.

Then again, in a see-what-sticks move, Vodafone beefed up its own music offering when it launched a subscription music service called MusicStation. Subscribers pay about $4 a week for unlimited access to songs they download over cellular airwaves and keep for the week or more, if they pay.

The subscription model has appeal. Vodafone (VOD) signed up one user per minute in the service's first week. But at $4 a week, the novelty appeal could wear off. To help offset end-user charges, carriers will try to sell advertising space within their services. If that doesn't swing the battle back to the operators, nothing will.  To top of page

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