The new Comes With Music offering, debuting in Britain on Nokia's 5310 XpressMusic handset, is a challenge to the Apple iTunes business model

by Jack Ewing

Mobile-phone giant Nokia (NOK) has taken a major step in its drive to move beyond selling hardware and into the potentially lucrative business of online content and services. On Sept. 2, the Finnish company officially launched its so-called Comes With Music offering, a new approach to selling digital music aimed at challenging the Apple (APPL) iTunes music store and the growing popularity of Apple's iPhone.

The Comes With Music service, first announced late last year (BusinessWeek.com, 12/4/07), bundles access to digital music into the purchase price of a handset. Starting in Britain in October and spreading later to other countries, buyers of the Nokia 5310 XpressMusic device, which is designed with hard-core music fans in mind, will get a year's unlimited access to the Nokia Music Store. They can download as many songs as they like and keep them even after the subscription expires.

The service also will let users share songs with other subscribers—creating online communities that could prove to be a powerful form of marketing. "Sharing music becomes legal, and you can start to build the offering into a social network," says Tero Ojanperä, executive vice-president and head of the Nokia Entertainment & Communities business.

ONE-PRICE SERVICE
Nokia hasn't yet revealed how much higher the price will be for the 5310 XpressMusic with the bundled music service than for the existing 5310, which now sells for about $200 before operator subsidies, or $50 on a two-year contract with T-Mobile USA (DT). The company also hasn't said whether it will offer annual subscriptions to the Nokia Music Store from other MP3-capable phones. Currently, customers can buy music by the song or album, or subscribe to streaming music.

After Apple encroached on Nokia's turf with its phenomenally successful iPhone, Comes With Music represents an attempt by Nokia to grab a share of the digital music market now dominated by iTunes. Currently, buyers of iPhones or iPod music players must pay extra to download songs from iTunes. Nokia is challenging that business model by charging one price for both the device and the service. "The goal is to get people to listen to more music on their mobile phones," Ojanperä says.

In another departure, Nokia is launching Comes With Music on phones sold by British electronics retailer Carphone Warehouse (CPW.L) instead of via conventional operators of mobile-phone networks. The retailer, which has 805 outlets in Britain, will be the exclusive dealer through the December holiday buying season, but Nokia is also negotiating with mobile operators to offer Comes With Music in the future. "Carphone Warehouse is the first step," Ojanperä says. Nokia also intends to expand the service to other devices. The ability to play digital music is a standard feature in Nokia smartphones.

UNDERPRICING THE IPHONE
By launching the service on the mid-range 5310, which Carphone Warehouse now sells for $145, including $18 worth of talk time, Nokia seems to be aiming at lower-end users for whom the iPhone is too pricey, says Mark Mulligan, analyst at Jupiter Research. "Nokia is taking the fight to Apple, but on its terms," Mulligan wrote in his blog on Sept. 2.

Ojanperä declined to give a timetable for rolling out Comes With Music in other countries, except to say that the service will be available in additional markets before the end of this year. Next in line will be the other 10 countries where the Nokia Music Store is already available.

That means U.S. users will have to wait a while. Currently the music store is operating only in Europe's largest markets, as well as in Singapore and Australia. Expanding to additional countries is tricky, because Nokia must negotiate rights with record companies and also build a repertoire of local artists. "This is a new proposition that requires a new way of thinking from the music industry," Ojanperä says.