Another test of free music business models comes as Nokia rolls out its Comes With Music service

Free music is becoming a hot proposition.  From Radiohead giving away their newest CD In Rainbows to the new music download service SpiralFrog, free is catching on.  However, when you dig into it, free isn't really so free -- SpiralFrog is funded by ads, and Radiohead asked users to pay for the CD out of their good will for the band.  Still, these trends to some still represent a positive change in the music business -- the shift from making a buck at any cost or gimmicks to making an honest buck based on the listener's appreciation.

Nokia is joining the crowd with its 'Comes With Music' program, which it is launching this year.  The service will offer unlimited music downloads to phone buyers.  The gutsy gambit has been much maligned by critics, who say that the service will cost Nokia and record labels money.

Not so says Nokia.  Liz Schimel, head of Nokia's music business is a firm believer in the service.  She states, "We expect to make money both from our traditional device sales, as well as from the 'Comes With Music' service.  I can assure you that we are looking out for everyone's interests in creating these new business models, including our own."

The new service pushes the envelope in that users get to keep the music they download during the 12 months of the service.  Despite the risk, Sony BMG and Universal have made deals with Nokia to offer their tracks on the service.  Schimel and Nokia hope that having the world's two biggest music on board the project will attract smaller labels and independent artists.  She states, "This new model is innovative and creates a positive situation for all stakeholders, but it does require a different way of thinking for our content partners."

Initial reports indicated Nokia would give Universal a payout of $35 per phone sold and an additional fee after the download of 35 songs.  Combined with whatever compensation Sony BMG is receiving, such numbers could more than nullify the typical 40 percent gross margin of the company's cell phones.  Not so says Schimel.  She states, "Recent articles that I've seen have fundamentally misunderstood the concept behind the Comes With Music model."

Some fear that Nokia's push will harm already slumping cd sales, while others thinking it will save the music industry.  One thing's for sure, if Nokia succeeds it may be the new number one in online music.  Last year it sold 146 million music phones.  If it paid a mere 20 dollars to the record labels per phone it would surpass the entire 2007 digital music market of $2.9B USD.  Tero Ojanpera, head of entertainment and communities business at Nokia states, "Comes With Music has the potential to equal -- and even exceed -- the current value of the business.  If we sell a single percentage of our total sales as Comes With Music bundles, the revenue for the music industry would be almost the same."

Some say that the service is a major threat to Apple's iPhone and iTunes, possibly stealing the trendy giant's thunder.  Mark Mulligan, research director at Jupiter Research states, "Comes with Music is one of the most exiting things out there in the digital music.  Apple is facing market perception of iTunes looking like yesterday's service. Basically, iTunes looks pretty much the same it looked 4 or 5 years ago."

However, the real question remains -- even with great sales how is Nokia going to pay for the service?  Therein lies the real head scratcher.  Nokia's secrecy is certainly worriesome, but one can only hope that such a big company would know better than to hang its hopes massively on an unprofitable service.  So for now, readers can contently believe that music grows on trees -- or err... cell phones -- until the market proves otherwise.

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