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Why Microsoft and Nokia Tied the Digital Knot
Music on cellphones is set to become a potent iPod challenger

Michael Stroud
02.24.05

Cannes, France - At Microsoft's stand at the 3GSM mobile conference last week, I congratulated a Microsoft executive on the company's good fortune in signing a landmark deal with Nokia.

"Actually, Nokia's the lucky one," he said.

Well, I stand by my congratulations. Microsoft has been struggling to crack the mobile phone market for years. Now it's got an opportunity to install music software in millions of Nokia phones, gaining access to a market that dwarfs Apple's iPod sales.

Consider that there are around 1.5 billion mobile handsets in the world today, give or take a few hundred million. That's orders of magnitude greater than the number of iPods sold so far.

Now, consider that 20 of the 40 handsets Nokia will release in 2005 will have MP3 players built in. Which market would you bet your money on?

Let's consider a few more facts. You don't need your MP3 player to survive, but you need your cell phone. When you're late for an appointment, you generally grab your cellphone, not your MP3 player. If you sign up for mobile service, you often get your mobile phone for free. When you sign up for iTunes, do you get a free iPod?

So Microsoft is clearly betting on a winning horse.

I'm not suggesting stand-alone digital music players are going to be replaced by cell phones. There are always going to be plenty of consumers who want high-fidelity, more expensive music players.

"There is going to be consumer demand for both scenarios," said Mike Beckerman, general manager of Microsoft's digital music division.

But MP3 players on cellphones - accelerated by the Microsoft/Nokia alliance - are going to dramatically change the market. Here are a few predictions for the next 12-16 months:

• MP3 players will become a commodity, available to practically anybody who buys a handset. To stay competitive, digital music players - at least at the low end -- will come down in price. Apple's "Shuffle" player, available for under $100, is an early salvo.
• To keep pace with Microsoft/Nokia, Apple, Real Networks will aggressively port their music software to phones. Expect a lot more announcements like Motorola's planned iTunes equipped handset.
• " Apple and other digital music player makers will begin offering digital music players with wireless capabilities, including cellular, WiFi and Bluetooth.
• Phones with USB connectivity to computers will become far more common, enabling the seamless transfer of digital music files between computers and phones.
• U.S. cellphone carriers -tooling up their new 3G networks -- will begin aggressively rolling out music streaming and download services, just as European carriers are now preparing to do the same.

"Last year was the year of imaging,", said Nokia vp of external affairs Bill Plummer. "This year may well be the year of mobile music."

The big unknown is how quickly consumers will spring to these new services. Even in Cannes - where the convention halls were awash with exhibitors hawking new music hardware and services -carriers were hard-pressed to point to any significant revenue yet from over-the-air music downloads or streaming services.

The imaging analogy is apt. In December 2003, cellphones equipped with digital cameras were hot items, but few consumers used the digital imaging capabilities. By last Christmas, seeing people snap digital pictures with their phone was a common sight.

I'd expect music on cell phones to have a similar trajectory.

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