News : Nokia confident free music downloads will profit

By Tarmo Virki

HELSINKI (Reuters) - Offering unlimited music downloads to phone buyers will make money for Nokia as well as record labels, the handset maker said, dismissing talk the move would come at the expense of profits.

"We expect to make money both from our traditional device sales, as well as from the 'Comes With Music' service," said Liz Schimel, head of Nokia's music business. "I can assure you that we are looking out for everyone's interests in creating these new business models, including our own."

The new music offering from Nokia, the first cellphone maker to push heavily into content, would differ from any other package on the market as users can keep all the music they have downloaded during the 12 months.

Last week Nokia struck a deal with Sony BMG to offer the label's tracks in its "Comes with Music" service, adding to last December's deal with top record label Universal.

Having the world's two largest labels on board looks set to help Nokia attract smaller music companies and challenge the dominant pay-per-track sales model for digital music.

"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," Schimel said, but declined to go into details.

Reports on different Internet media have suggested the world's biggest handset maker was paying $35 to Universal alone for each sold handset; and some reports suggest Nokia would be paying an extra fee for each downloaded song after the first 35 songs, potentially eroding its close to 40 percent gross margins in cellphone operations.

"Recent articles that I've seen have fundamentally misunderstood the concept behind the Comes With Music model," Schimel said.

Such unlimited download models could offer a shot in the arm to the ailing music industry, which is struggling to find ways to make up for falling CD sales.

However, the success of Nokia's service could hurt CD sales further when clients who still buy their CDs turn to phones, said Mark Mulligan, research director at Jupiter Research.

"There is inherent tension in there," he said.

CHANGING THE APPLE WORLD?

The digital music market totaled just $2.9 billion in 2007.

Nokia sold 146 million music phones last year -- if all of those had included the "Comes with Music" bundle, just an extra $20 per phone would make Nokia's service bigger than the total market.

"Comes With Music has the potential to equal -- and even exceed -- the current value of the business," Tero Ojanpera, head of entertainment and communities business at Nokia, told a news conference last week when unveiling Sony BMG deal.

"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," Ojanpera said.

Total sales of Nokia's top music phones, the 5310 and the 5610, were more than 4 million during the January-March quarter. Unsubsidised retail prices for the phones were 215 euros ($334) and 280 euros.

With its iconic touch-screen model, Apple's iPhone shocked the handset industry last year, but at prices starting from 400 euros it has not captured a mass following in Europe.

Now, Nokia has stolen the spotlight from Apple in the digital music world, analysts said.

Record labels are looking to Nokia and others to challenge the dominance of Apple's iTunes as they have struggled to negotiate with the American group on a level footing when it comes to issues such as pricing.

"Comes with Music is one of the most exiting things out there in the digital music," said Jupiter's Mulligan.

"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," he said.

(Reporting by Tarmo Virki; Editing by Louise Ireland and David Cowell)