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US mobile carriers shun iTunes

Playing the long game?

Analysis Apple's early lead in music downloads is costing it potentially more lucrative wins with the mobile carriers. Business Week reports that the carriers have ganged up on Apple, with Sprint PCS and Verizon among the networks who have passed up the opportunity to carry Motorola's iTunes phone.

This hardly counts as the most surprising news we'll hear all year. But looking at the long term, there's upside for both parties far beyond what the current market can deliver.

The mobile market is maturing, which means there are fewer new customers to woo. Operators want to avoid the fate of becoming commoditized networks, or in the unforgiving jargon of the business, "dumb bit pipes". Which is why they pay so much for branding in the form of costly high street stores, and ensuring you use that network for your transactions, whether they're phone related or not. Apple's ability to punch above its weight - it's one of the world's most recognized brands - leaves the carriers with some anxiety. Cingular alone pulled in $8.2bn in the quarter it reported yesterday. Verizon, which has a coherent network strategy encompassing wireless and wireline, pulled in almost $15bn in Q4 2004. Compare that to Apple's $3.2bn quarter. So the networks reason that they hold the upper hand, and can dictate the terms of the deal.

However some of the reasons given by Business Week for their cold shoulder to Cupertino aren't as important as the magazine suggests, although they're already solidifying into the Conventional Wisdom.

Let's have a look each one.

"Operators want customers to download songs over the air, directly to handsets. But with the iPod phone, customers would download songs to a PC and then copy them to the phone," according to the article.

In the long term that's true. Operators envisage ubiquitous wireless in the home, and they want to be the ones to provide it, regardless of how it's delivered. In a few years we'll be saturated by wireless coverage, and even unconnected devices will be able to make some connection, if it's only to other hardware near by. Don't underestimate the potential of wireless 'data dispensers'. But right now very few carriers, even with the fastest 3G networks, anticipate selling MP3 files directly to the handset.

Two factors are mentioned by Register contributor Charles Arthur here, and they can't be underestimated. The user interface on the current generation of handsets doesn't lend itself to iPod capacity collections, notes Charles. At best, you can navigate no more than 20 songs with any comfort. (This reporter has been testing Nokia's flagship media phone the 7710, and it confirms the need for a fast processor and dedicated buttons.)

Don't forget, he adds, that the battery is rapidly diminished by MP3 playback, although solid state devices have a huge advantage over rotating platters.

We can look to advances in technology, such as displays (next year's OLEDs will have twice the density of today's smartphones), batteries, and human interface design to close the gap. In fact we can envisage the iPod itself looking rather staid alongside these innovations. But as with network capacity, the competitive situation isn't going to change very soon.

Then there's the thorny issue of pricing.

CNET reported last week that the record labels are using the wireless operators as a threat to hike up the fees for music downloads. Since Europeans are prepared to pay the equivalent of $5 for a ringtone, won't they pay $2.50 for an MP3? This is optimistic. As with SMS, carriers were almost the last part of the value chain to realize what people were using the networks for. The multi-billion dollar ringtone business sprang out of start-ups located offshore or in back garages. Only when it was a popular phenomenon did the networks realize what was going on, and decided that they too would like some of the action. But a ringtone isn't a song file, and they serve very different purposes. A ringtone is a broadcast fashion statement, designed to be overheard. A song will most likely be heard in private (alas). One is a way of advertising yourself to the world, the other is a way of avoiding it (alas).

But no analysis these days is complete without examining how the parties are preparing for a flat fee future. Only by taking the long view do we see that today's phone war is pretty phoney.

Under a compulsory licensing regime, which is endorsed in another new book we reviewed yesterday, both device manufacturers such as Apple and Nokia, and the networks themselves have the most to gain. Today the carriers and hardware vendors are in a state of what might be described as mutually co-operative discomfort. But under a flat fee, we'd have a dramatically different competitive landscape.

The distinction between a discrete music file and a stream has already been blurred by devices such as the Bug digital radio (a radio with a Record and a Rewind button, with removable storage), and will in the next decade disappear altogether. This in itself has dramatic implications for media ownership policy and monopoly regulation.

The only reason a compulsory license hasn't been introduced already - and the subject was broached in Congress in 1999 - is the large recording rights holders' fear of losing their distributional channels.

It's more than likely that telecomms companies, which dwarf the entertainment industry, will be only too delighted to help them out. The carriers already have the high street presence. Don't be surprised to see visit your Tower Records Store in the future, and discover it's moved a few doors down, to where the Cingular or Verizon shopfront used to be. ®

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