On 8 August 2006, Nokia acquired Loudeye Corp, a provider of digital music platforms and digital media distribution services, for USD61 million. Loudeye, which operates in 13 countries, and owns On-Demand Distribution (OD2), a European music download supplier that provides distribution services for companies such as Oxfam, Tiscali, MSN and Packard Bell that want to set up their own online music stores.
Nokia expands its role in the mobile music value chain
Nokia and Loudeye have been working together in the music business since February 2005, when they unveiled a white-label mobile music platform for mobile operators. Through the acquisition Nokia is aiming to move up the value chain by offering consumers a comprehensive mobile music experience, including devices, applications and the ability to purchase digital music. It appears that Nokia will set up a Nokia-branded digital music service targeting its own handset users. The major advantage Loudeye provides Nokia is its catalogue of over 1.6 million music tracks - licensed broadly from major labels - which means that Nokia will avoid potentially lengthy negotiations to acquire content.
Nokia's acquisition of a digital music distribution platform - and the launch of its 3250 model and high-end N-series handsets - is a further example of the way in which mobile handset vendors (such as LG, Samsung, Sony Ericsson and Motorola) are challenging the dedicated music player market, currently led by Apple's iPod and iTunes ecosystem. In fiscal year 2005, Apple sold 22.5 million iPods, while during the same period Nokia shipped around 40 million music-optimised handsets. Mobile handset manufacturers could eclipse Apple in volume shipments if they are able to integrate a music distribution platform as user-friendly as iTunes.
The success of Nokia's mobile music experience strategy will depend on how it manages its relationships with mobile operators
Given its market-leading position in the handset market and long-established relationships with mobile operators, Nokia's acquisition of Loudeye's large music catalogue and expertise in digital music distribution means they are well positioned to implement their strategy. However, much depends on how Nokia deals with mobile operators, who will inevitably want to benefit as much as possible from any services sold to their subscribers.
By offering its own mobile music service, Nokia will not only compete with computer-based download services such as Apple's iTunes, but will also challenge operators who aim to provide over-the-air mobile music services to subscribers. Given that off-portal sources already account for around 60% of total mobile content sales in Europe and 40% of those in North America, mobile operators are highly unlikely to welcome a further threat to their non-voice revenues. Their interests previously collided when Nokia launched its own content services through its portal (Club Nokia) in 1998. However, following pressure from operators, Nokia subsequently withdrew the commercial services. The level of success enjoyed by Nokia's mobile music experience will depend on the kind of revenue-sharing business model Nokia will be able to offer mobile operators.
Further vertical integration in the market is possible
In the light of the Loudeye acquisition, rumours about a possible buy-out of Napster have intensified. There are quite a few similarities between Napster and Loudeye. Napster, which was forced to move from its original peer-to-peer file-sharing model to a monthly subscription model, also has an extensive catalogue of music tracks with the associated content distribution rights. Both companies have an established technological platform and like Loudeye, Napster recently co-operated with major manufacturers; in June 2005 it signed a deal with SonyEricsson to deliver mobile music platform solutions. However, whereas Loudeye is almost unknown to the wider public as it offers white-label services to companies, Napster has a strong brand in the digital music business, which may make it a suitable target for other players (such as device manufacturers) who wish to follow Nokia's path.