Nokia to Take on Apple at its Own Game

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Nokia's Chief Executive Olli-Pekka Kallasvuo speaks at a news conference in London

If Apple encroached on Nokia's turf when it introduced its much-heralded iPhone, Nokia is striking back by taking aim at Apple's dominance in the digital music biz. On Wednesday Aug. 29, in a gala event in London, Nokia CEO Olli-Pekka Kallasvuo announced that his company will soon fire up its long-anticipated music downloading service. The Nokia Music Store will go live later this year as a crucial component of a new Nokia website called Ovi. Competing against downloading sites like Apple's iTunes, it will let consumers download millions of songs directly onto their PCs and Macs or, unlike iTunes, straight onto their phones via mobile airwaves.

But if Apple CEO Steve Jobs found Nokia's announcement interesting, there's little doubt that executives at the world's mobile phone networks found it positively riveting. Nokia's download site marks a radical departure from the traditional way of doing things in which handset makers like Nokia have to sell their phones to mobile operators like Vodafone, Orange, T-Mobile and 02. And those companies, in turn, sell services — not just voice calls but increasingly things like ring tones, music and other forms of entertainment — to consumers. In listening to Kallasvuo on Wednesday though, it was clear that Nokia is messing with the status quo. "This world does not work the way the old world worked," he said, explaining that Nokia is now an Internet company. "We have begun expanding our business beyond hardware to include services and software."

For operators, who are little if not service companies, the word "service" must have rankled. But there was more from the boss from Nokia, the powerful Finnish company that dominates the world's handset market with a nearly 40% share and which has the clout to force industry shifts. "We are transporting Nokia into an Internet-driven company," he said. "Today, we are constantly thinking beyond the phone. Devices alone are no longer enough."

Kallasvuo denied that this big push into services would damage relations with operators, saying that Nokia is finding ways to work with them. Executive vice president Anssi Vanjoki suggested that Nokia might even share Website revenue with operators. After all, the Website could be a golden opportunity for Nokia to sell advertising space, so how bad would it be to arrange a little revenue sharing with old partners? Vanjoki, who's in charge of marketing Ovi, says Nokia will be a more flexible partner than Apple, which so far has restricted the iPhone to one U.S. carrier (it's due in Europe later this year) and doesn't allow downloads straight to the iPhone handheld.

That may be true, but as Nokia starts embedding links to Ovi into more phones, operator sentiment could sour. Nokia is loading Ovi onto two fancy phones it introduced this week for shipment later this year — a refurbished N95 and the new N81, both with 8 gigabytes of storage capable of carrying 6,000 songs, according to Nokia. Vanjoki says the long-term plan is to embed Ovi throughout the Nokia range, including two new midrange, 4-gigabyte models it announced this week.

Already, cracks are surfacing in operator relations. Earlier this week, a memo from pan-European carrier Orange that was leaked to the press complained that the combination of the Nokia link and Orange's existing music service on the same phone could confuse customers. Orange does not deny the contents of the memo, but declined to elaborate on it, except to say in a carefully worded statement that it is testing the N81 and has not yet committed to it.

Nokia can expect more of the same rockiness. TIME also contacted major European carriers Vodafone, T-Mobile and Telefonica O2. None were willing to comment on the delicate subject of Nokia's services push. "Clearly, there are tensions. This puts them on a collision course with some their customers," says Ben Wood, a director with London telecom consultancy CCS Insight. But Wood noted that operators should consider what he called a "greater good" scenario in which customers who buy a Nokia phone through the operator might dip more into the operators own service offerings as well.

Nokia has been through this before in the early 2000s, when in deference to operators it toned down an initiative called Club Nokia, a portal for selling games and ringtones. But things are different this time, because as Kallasvuo put it, the Internet, and in particular the mobile Internet, "is one of the most opportunity-rich markets the world has ever seen." Nokia can't step aside for operators because the competition is already fierce and because more boundaries between which companies do what are falling every day. Not only has Apple entered the phone business in the U.S, but Internet companies are starting to sell mobile services. "Nokia knows that Yahoo, Google and those guys don't take any prisoners," says Wood.

And the digital music business is one of the prime battlefields right now, with new vendors entering all the time. In the week alone leading up to Nokia's announcement, giant retailer Wal-Mart strengthened its downloading service, and MTV, Real Networks and Verizon Wireless joined music forces. They're all chasing a digital download business that the International Federation of the Phonographic Industry says grew to $2.1 billion in 2006, or 11% of all recorded music sales, as more artists embrace it. "Any band that's resistant to it is crazy," says Adam Levine, lead singer of Grammy-winning L.A. group Maroon 5, which gave a jumping 35-minute live performance at London's Ministry of Sound nightclub as part of Nokia's launch. According to Ovum analyst Jonathan Arber, Nokia is frustrated that operators' own cellular music download services, "have ramped up very slowly," he says. "They haven't been the killer application people thought they would be." A combination of high and confusing pricing, and services often criticized as clunky, have dampened users' enthusiasm. Perhaps Universal Music Group International chairman Lucian Grainge was jabbing at operators' services when he lauded Nokia's move this week. "It's good for music — and good for our artists — that consumers can easily find and buy the songs they want, when they want. That's why we welcome the Nokia Music Store," he said.

Another reason why the time is right for Nokia: among the people who do put music on their phone, most of them "sideload" it by transferring tunes over from a PC. According to research firm M:Metrics, 85% of the people who listened to music on their phones in Europe's big 5 countries and the U.S. from February to April did not get the songs through cellular downloads. Nokia's service supports both cellular and PC Internet downloads.

Nokia may not be the only handset vendor looking longingly at services. Rival Sony Ericsson, currently offers a limited collection of tunes from sister recording company Sony BMG, but may soon expand. "We'll have more to say in the future," says president Miles Flint. Sony Ericsson would follow Nokia's tactic of slowly building up to a full-on Web services push. In the last couple of years, Nokia has taken many small steps, tying phones into Yahoo, Flickr photo sharing and content from Turner Broadcasting, among others. Last fall, it launched a music Web site called Music Recommenders fronted by David Bowie and meant primarily as a music referral site. This summer it acquired media sharing site Twango and struck a deal with Microsoft to put Windows Live on Nokia phones, allowing users to send and receive instant messages and emails.

Many of those, like the Nokia Music Store, will become part of the umbrella Ovi Website that will mark the company's formal Internet coming out when it launches later this year. Ovi — the Finnish word for "door" — could even offer TV programs at some point. Vanjoki, who is in charge of marketing Ovi, says it will includes millions of songs from all 4 major record labels as well as from regional bands. Nokia has set a European price of 1 Euro for a tune, and of 10 Euros for a CD. It has not finalized U.K. pricing, but when I searched for Dexter Gordon CD's in a test drive, the screen showed 8.00 for a CD and 80 pence for a single. (As a sign that Ovi well might deliver millions of tunes, it listed 27 different CDs from the tenor saxophonist).

Nokia has big hopes for Ovi against iTunes. "I've never participated in a competition where I finish number two," says Vanjoki. It also hopes Ovi helps it to sell more higher-profit higher end phones, although Nokia will eventually need a touch screen phone to match Apple's.

Keeping operators happy will be a challenge. CEO Kallasvuo is optimistic. Extolling connectivity, he told a story about how in the middle of a rainy golf outing he fetched an Internet weather report on his cellphone, indicating the showers would soon cease and allow him to resume playing. His impressed golf mates asked, "What do you have in that thing?" Long time business partners are now probably asking the same question, but not necessarily in the same approving manner. Nokia will manage, but it can expect a few storms along the way.