"hello, This Is Your Download Calling..."

Before this year ends, record labels and wireless carriers will embark on a crusade to make wireless the next big distribution channel for music.
Mobile phone users-many of whom have already discovered the joys of camera phones, text messaging and custom ringtones-will be given the ability to find, purchase and download full songs from mobile music stores operated by their wireless service provider.

"We're very excited," says Thomas Hesse, president of global digital business for Sony BMG. "We think the mobile platform is the likely long-term platform of choice for portable music."

Hesse predicts digital sales will represent 7.5% of all music revenue by the end of this year, half of which will come from mobile offerings, including ringtones.

The market's promise is best seen in the 180 million mobile phones already in use in the United States. That dwarfs Apple Computer's iPod, which is at 10 million units.

Some in the media view the introduction of mobile music downloads as the start of a death match with Apple. But for the music industry, peaceful co-existence is the preferred scenario.

"We look at it as another distribution channel," says Larry Kenswil, president of Universal Music Group's eLabs. "I'm less concerned with quote 'iPod killers,' because we like to see lots of different devices . . . We'll put our stuff for sale in general to whoever has a store."

But if a battle royal is to ensue, the mobile phone industry has some major hurdles to overcome.

For one thing, consumers have yet to indicate any demand for buying full songs on their handsets. However, the mobile business has a history of creating demand where none existed and generating new revenue by introducing emerging technologies to its existing customer base.

"It will be similar to what we saw with camera phones," says Paul Reddick, senior VP of business development and planning for Sprint. "The majority of people who use camera phones don't have a digital camera and never took a digital photo until they did so with their phone."

Hesse adds, "There's a marketing job that needs to be done for consumers to realize that these data services are there."

He puts the onus on the mobile phone industry. "It's up to the carriers, who are building the service itself. We're not really a retailer."

There are also thorny issues of pricing, file interoperability and licensing.

What's more, the mobile industry must get its next-generation phones into the hands of enough consumers to give meaning to the market-and its own investment in infrastructure. The major carriers-Verizon, Sprint, Cingular and T-Mobile-have spent billions upgrading their networks to become high-bandwidth, high-capacity delivery pipes capable of DSL-like speeds.

PRICES COMING DOWN

Poised to take advantage of these souped-up networks are next-generation phones that feature greater internal and external storage capacity; music playback and management software; and dedicated music controls that blur the line between phone and MP3 player.

Today's high-end, music-optimized "smart phones" can retail for more than $500, but carriers and handset manufacturers are adding basic MP3 capabilities as a standard feature in mid-tier models being introduced this year. Nokia plans to include various levels of music-related functionality in half of all the phones it presents this year, while Motorola says up to one-third of its 2005 lineup will be music-enabled.

The wireless industry is known for its rapid hardware replacement cycle. Camera phone sales grew from 16% of all phones sold in 2003 to 38% in 2004, research firm Strategy Analytics says. The replacement cycle for wireless phones is expected to fall from 10-12 months to six-nine months in the next year.

Still, it remains to be seen whether consumers will use these phones to buy downloadable music, or just load them with music files they already own.

If they buy wireless downloads, consumers likely will be asked to pay a premium price. When it comes to full-song downloads, prices as high as $3 per track have been mentioned. That could be a tough sell to consumers who enjoy music mobility in a download world where 99 cents is the norm.

"Consumer acceptance of price points above 99 cents is going to be difficult," Jupiter Research analyst Michael Gartenberg says.

Carriers agree that simply re-creating an online store in the wireless environment and charging more for the same content is unlikely to garner much enthusiasm. Yet they are quick to note that consumers pay $2 or more for a ringtone but only 99 cents for the full song. (In fact, record companies and carriers plan to offer tracks that, once downloaded, can easily be assigned as the master ringtone as well.)

The subscription model is another option. Tagging an additional fee on an existing subscription service is a low bar to cross. Sprint already offers streaming music for an added $5.95 per month, and Verizon charges $15 per month extra for access to its VCast mobile video service.

Whatever the pricing model, consumer acceptance is "going to come down to the user experience," says Mark Nagel, director of premium and entertainment services at Cingular.

The strength of the iPod/iTunes platform is Apple's control of the entire consumer experience, from the retail site to the device to the back-end technology.

Wireless operators do not have the same kind of control over the customer experience. They offer several models of phones from a variety of handset manufacturers that use different technologies and, sometimes, digital-rights-management standards. Screen size, battery life and user interface options also differ.

Coming out of the woodwork to address these issues are companies that provide the front-end retail and back-end support functions-including royalty payments-to operate a turnkey mobile music service on behalf of carriers. They include Loudeye, Melodeo, Groove Mobile and Wider Than, all competing to manage these complex platforms for wireless operators.

Even wireless heavyweights like Nokia and Sony-Ericsson have gotten into the game. Nokia recently partnered with Loudeye and Microsoft to offer carriers an end-to-end music delivery solution.

"Carriers who try to get into the enormity of the number of titles and changing content will see it's a difficult and complex problem," says Michael Brochu, president/CEO of Loudeye.

PHONE-TO-PHONE TRANSFERS

Perhaps the most complex problem mobile music services face is how to facilitate the transfer of music files bought via the phone to other devices without encouraging piracy. Many feel that for a mobile music service to thrive, music bought wirelessly must be accessible by other devices, such as the home computer. Of even greater interest is allowing users to forward tracks stored on their phones to their friends.

But a mobile phone is a closed device, meaning content downloaded to it cannot be moved to other devices. Even if carriers permitted such transfers, the ability to move files between different phone models on different wireless networks is a major technical challenge; adding DRM to make sure those files are protected and paid for is harder still.

To solve these problems, most mobile music service providers can offer a "dual-delivery" process that sends the same track to the subscriber's phone and PC.

For phone-to-phone distribution, some mobile services will allow users to send their friends links to songs that exist at the service provider's database. The songs can then be sampled or purchased directly, even if the users subscribe to different carriers. But both carriers would have to use the same mobile music service provider.

"It's upon us to provide music in a way that can be easily used on any device," says Mike Gaumond, VP/GM of Motorola's media solutions division. "If we make it easy . . . consumers will pay for it."

The carriers will have less control over resolving mobile music licensing issues, particularly when it comes to publishing rights and rates.

The complexities include determining which mobile uses are public performances; which are mechanical reproductions or digital phonorecord deliveries (DPDs); and which involve both rights.

For example, previewing a recorded song before purchase on the Internet or some other public platform, such as a mobile phone, is generally considered to be a public performance, yet the song was also copied onto a server to make that preview available. That invokes the mechanical right.

There is also the unresolved question of whether certain uses are subject to the compulsory mechanical license or must be negotiated separately with each music publisher.

Some parties hope that Congress will resolve some of these issues by passing a bill covering compulsory licenses.

Rates are even more unpredictable. While the Harry Fox Agency administers DPD licenses for publishers with various digital services, each publisher can set its own rates with each service provider. Some mobile phone providers have also negotiated separate deals with performing-rights organizations, but the rates have not been revealed.

As for the labels, sources say they will seek higher wholesale fees for mobile music licenses than for online downloads, particularly for tracks that come bundled as master ringtones. Labels also will want assurances that there will be some degree of protection for their intellectual property.

But the promise of mobile music distribution provides a strong incentive for the music industry to provide content.

Ease of purchase is a major benefit. Mobile phones are connected to two-way networks that allow purchases on the go. Most wireless subscribers pay a monthly bill, so a credit card isn't needed to buy tracks. That means subscribers without credit (read: teens) can buy content that they can't buy online. What's more, there are no credit card fees taking a chunk out of sales.

The labels will watch the development of mobile music services during the next year very carefully-especially since mobile operators have a track record of false starts and botched rollouts.

Ultimately, music distribution is just one way for the carriers to make money. In fact, they are looking more to mobile video services as their primary multimedia revenue generator.

"Music is just one ornament of the tree for them," says Richard Siber, an veteran wireless industry consultant. "It's more important for the music industry to get this right than for the wireless industry." ••••