It’s very, very timely – and even if you don’t follow Nokia, mobile or telecomms it’s a fascinating exercise in business analysis and organisational studies. Enjoy.

Read more at The Register…

It must be frustrating to sketch out a long-term technology roadmap in great depth, and see it come to fruition… only to goof on your own execution. But to do so repeatedly – as Nokia has – points to something seriously wrong.

Nokia spent more than a decade preparing for Tuesday this week, when it finally launched its own worldwide, all-phones application store. It correctly anticipated a software market for smartphones back in the mid-1990s, when it was choosing the technology to fulfill this vision.

That was just one of the bets that came good. Leafing through old copies of WiReD magazine from the dot.com era, filled with gushing praise for Enron, Global Crossing, and er, Zippies, I was struck by the quality of the foresight in a cover feature about Nokia. (Have a look for yourself.) WAP didn’t work out, but I was struck by particularly Leningrad Cowboy Mato Valtonen’s assessment that “mobile is the Internet with billing built in”.

And so Nokia has been encouraging users to download applications for users. My ancient 6310i wants me to download applications. Every Nokia since has wanted me to, too. Seven years ago, the first Series 60 phone (the 7650) put the Apps client on the top level menu, next to Contacts and Messaging.

The problem is today, it’s Apple and BlackBerry who have the thriving third party smartphone software markets. For six months, punters have been bombarded with iPhone ads showing what you can do with third-party apps. And yes, it’s like Palm all over again, but they’re very effective. So if Apple’s store is the model, then what on earth is Ovi?

The launch was “an utter disaster” according to one blogger, or in a more measured assessment (from Ewan at All About Symbian), “rushed, early and not fit for public consumption”. Nokia accepts second-best from Ovi, which apart from Maps is second-best in every category, the company all but admitted recently. But the Ovi application store deserves a Z-grade.

Web services or bust

It’s now clear that it was simply too ambitious to roll out a store to so many territories and in particular, to so many device categories, in one Big Bang. The number of devices supported goes back six years – encompassing eight versions of Series 40 and three versions of S60.

We waited a couple of days until the server load eased up, and Bill Ray kicked the tyres. On older devices it was mostly a miss. The mobile clients I’ve tried are painfully slow, don’t have previews and can’t distinguish between trialware and zero-priced applications. They either bill you in a foreign currency or simply drop you down a dead end.

The web version is even worse: try navigating through pages in Firefox, or try changing your default device in the preferences. The result is that every attempt to actually get applications is thwarted. Still, the pages fade in and out, in a very Web 2.0-style fashion. And maybe that’s the clue.

Apple’s App Store requires iTunes or the native client. iTunes is a familiar place for anyone who’s shopped for songs, audiobooks or movies there. It’s fast and slick, there’s a preview for everything, and pricing is quite clear. You’re only asked for personal details when you reach the acquisition stage. You get the same experience on the iPhone/Touch native client.

There’s really no need for a web-based version of the Ovi store at all, and piping everything through the Nokia PC suite (or some Mac equivalent) would at least encourage people to try the exciting Nokia PC Suite add-ons, such as Nokia Map Manager and er… Nokia PC Suite Cleaner. Apparently that cleans up after earlier Nokia incompatibility cock-ups.

(This is an ominous sign of trouble ahead: like Palm designing its stylus dual-purpose, one of which is to make rebooting easier after a crash. It’s not something the user should ever see.)

But Nokia has arguably far more at stake here than Apple or RIM. Once you’ve spunked $8.1bn on a mapping software company – shouldn’t you want people to use the maps – and the potential upselling opportunity? Or are the maps just a hippy giveaway?

‘Strategy’ is stretching it a bit

We all know in hindsight Nokia that should have focussed on making the mobile and PC clients perfect, and limiting the number of devices at launch to a subset of those supported. Anything before S60 3rd edition didn’t really need to be there, and there’s a case for limiting to devices launched in the past 18 months, even though there are a lot of N73s and E61s out there.

Separating the excellent applications from chaff such as movie trailers and wallpaper might have helped. There are still a handful of good applications out there, despite diminishing interest in Symbian, the pick of which is the best mobile email client in the world, Profimail. (Measured in ease of use, features, and the fewest seconds it takes to achieve a given task – a formidable combo.)

But again that goes against the Web 2.0 ethos of “stick any old crap up there – and let the Hive Mind sort it out”. No thanks, I don’t want MOSH 2.0.

And as for games – it would be flattering Nokia to call the six year N-Gage adventure a “strategy”. Again, it saw the market early, but didn’t follow through. Every now and again the multi-billion dollar investment veers back into view, only to disappear again. Is it N-Gage or Ovi Gaming? The few titles that are out there aren’t too bad, but again Nokia’s delivery strategy makes them hard to obtain. Meanwhile you can’t escape people playing games on their iPhones, or iPod Touches.
Operation Rescue Nokia

The market could benefit from a healthy Nokia software market, so here are some suggestions. There’s a valuable lesson to be learned. In business as in war, you make the most of your assets while trying to minimise your weaknesses. Nokia’s Ovi Store does the opposite: it emphasises the complexity and lack of focus at the company, and its disorganisation. If your first and only experience of Nokia was Ovi, you would never believe the company could ship 50 products into 120 markets with military efficiency.

Firstly, Nokia should focus on people’s needs – and applications that make the phone useful and fun – and not building up a “a portfolio of web services”. It’s already invested heavily in Maps and games – just make them easy to try and buy.

Ovi means “door” in Finnish

Secondly, the Ovi brand has made no impact on phone users at all. There’s no shame in abandoning confusing or invisible brands. Confine Ovi to mean boring, management services like backups, or data transfer, or services discovery. These shouldn’t be underestimated; they should give users security and peace of mind.

Thirdly, the vast majority of users want to do a few tasks simply – take note of the Magners TV ad which now singles out flash smartphones that are impossible to use. Nokia has inched towards better usability with the E71 and the 5800, but this needs to be a company-wide goal. Showing photos on the family TV, sharing photos with a small group – all much more useful than the 2.0 guff.

And finally, the managers responsible for putting together the Ovi Store should be put on Nokia’s naughty step – and left there for the Finnish winter.

And Nokia’s richest partners aren’t interested in helping out.

But it’s a radical and interesting offering that merits some serious analysis: certainly, much more than Nokia’s other Dad-at-the-Disco attempts to get down with da yoot.

As we wrote last December – Comes With Music is much more subtle and interesting than most people gave it credit for. There are strings attached, but fewer than with any such previous bundling promotion.

Nokia has been inhaling Chris Anderson’s “Freetardonomics,” and this is what comes out when it exhales. ..

The idea behind Comes With Music is to make Nokia’s handsets more attractive by giving away music – unlimited for one year, which the punter can then keep. Two or three particularly newsworthy aspects have emerged from the formal announcement today.

Unlike MySpace Music, Nokia has signed deals with (real) indie labels. The Beggars Group (representing 4AD, Matador, Rough Trade, and XL), Pias, and Pinnacle (representing hundreds more) have signed up – as well as the big four labels: Universal, Sony, Warners, and EMI. The major publishers are also on board, too, says Nokia. Although MySpace is a site with an “indie” audience, News Corp. seems to think that serving them the music they want is supernumerary.

In addition, Nokia has confirmed that users will be able to keep the music they download in the first year indefinitely (which we knew) and move it around different devices (which we didn’t). However, there is DRM involved, so devices must be “authorized,” or approved against a central authentication server. That might prove too freedom-inhibiting for many. And thirdly, CwM users will be able to exchange songs with other CwM users. Sort of.

The operators snub Nokia

The real deal, as sold through Carphone Warehouse – the bit you sign your name to – looks less attractive than the general concept. While CwM will be offered to pay as you go customers, it requires a £129.95 upfront payment. And for that, you merely get a year old 2G handset, the 5310 XpressMusic phone.

This tells us that the mobile operators have again kicked sand at the Finns, blocking Nokia’s traditional route to the mass market. We’ll see why this is important in a moment.

What it means is that in practice, the business end of Comes With Music is neither “free,” nor particularly cool. Since the big selling point is that it “feels like free” – apparently viewed as necessary to compete with free downloads – you may wonder what the point is. This is more a case of clumsy and slightly deceptive marketing, rather than a lousy product.

So right away, Nokia badly needs more CwM devices and more partners. But without the might of the mobile operators – their ubiquitous high street presence and deep subsidies – free won’t look or feel like anything but an expensive, upfront music subscription program.

Maybe Nokia took one inhalation of Freetardonomics too many? Well, maybe it doesn’t need to offer a free service, just one that’s convenient and cracking value? That’s where CwM’s rival thinks it has the edge.

Omnifone’s rival MusicStation offering is also unlimited – but the idea is that instead of “free,” it’s two quid a week. For this, you can chat and exchange playlists with other subscribers, grab music over the air, and crucially, you’re not tied to any particular handset or manufacturer. It’s won widespread praise for its user interface, and as an instant gratification “personal radio on demand,” people love it. Having used it, I can quite see why.

People paid astronomical amounts for SMS once, because it offered such value. The legal P2P file-sharing services – coming soon to the UK – are also making the same bet: people will pay for something of great value. Just make sure it’s insanely great. Research tentatively offers some encouragement.

Now Omnifone is spreading its wings a little. Significantly, Sony Ericsson became the first OEM to bundle a white-label version of MusicStation under the name PlayNow Plus last week – and unlike Nokia, it’s actually got the operators on board, doing what Nokia wished they’d do for ComesWithMusic and put their hands in their pockets. Well, one operator at least: Sweden’s Telenor will bundle MusicStation at no cost for the first six months. Sony Ericsson also won a concession on how much music you can keep at the end.

Omnifone’s Rob Lewis welcomed the Nokia move in a prepared statement.

“The music lover… will be able to expect unlimited music downloads as a fundamental part of their everyday mobile experience,” he said. Both Nokia and Omnifone both have that part of the proposition right. However, only one of them looks like a real business. And the problem is the ideology of “free.”

People don’t simply value free stuff that they know should come at a price. The fatal missing chapter of Freetardonomics (and its semi-respectable cousin, “Two Sided Business Models”) is that as punters, we just don’t respect stuff that’s given away – and we don’t really respect the people who give it away either. We’ll graze and move onto the next chump with a “free” offer. By contrast, we expect far higher standards of service from something we’ve paid money for. And persuading punters to pay for something they value is what reaps lasting loyalty for a service company or manufacturer.

That’s a lesson from another age of marketing, and one that Nokia in its rush to embrace the Californian Web 2.0 snake oil merchants, seems to have forgotten.

All this can be remedied by turning Comes With Music into an attractive music subscription service, dropping the false “free” claim that makes it look like a bit of swindle (when it shouldn’t), and gently showing the consultants the door. The only question is not if Nokia adds a modest price tag, but when – and turns it into a real business proposition.

©Situation Publishing 2008.

Speaking at a marketing website called Nokia “Conversations” (“Stories from around the neighborhood” – it says), Jalkanen gives a very frank overview of the grassroots enthusiasm for Nokia’s S60 platform.

“Pretty much the only community around S60 is the community we pay to be there,” says Jalkanen, “a few lone, strong, awesome warriors notwithstanding”.

He’s speaking in a personal capacity, but is actually saying much the same as Symbian’s John Forsyth said here, only without the wishful thinking. But what a great metaphor for the Finns’ oh-so-earnest attempts to manufacture grassroots enthusiasm.

Nokia didn’t invent the idea of astroturfing, but more than any company in the Noughties, it’s taken it to heart.

Nokia’s Ambassador program turns participants into walking billboards – get a phone, and talk about it in the hope someone will hear it. And that’s just the tip of the “social media” iceberg. Never have so many freebies been thrown at so many bloggers – with so little to show for it. For as soon as anyone starts talking (or commenting) about how delightful these products are, you know you’re listening to a paid-for robot. This cheapens everyone.

(We put this down to the corporate equivalent of a midlife crisis.)

Now what a contrast with Apple. Many of you find the Apple cult downright creepy – and it is. But there’s no doubt that the enthusiasm exhibited by fanboys (and fangirls) is genuine. There are few sadder sights in London than the “flagship” Nokia Store on Regent Street, almost directly opposite Apple’s temple.

This gleaming, high budget glass and steel designer affair is an homage to the Apple store on which it’s modelled. Floor and ceiling are silver birch, apparently “inspired by the forests of Finland”.

Only there’s nothing to buy – just a few phones behind museum-style glass cases. Consequently the only humans in the store you’ll ever see are the staff.

The Casio store on Carnaby Street, I noticed this morning, is a-buzz. Do Casio need “social media”? Or do they just make stuff people actually want to buy?

I find it exquisitely ironic that the philosophy behind the decision to end Symbian’s independent existence as a joint-ownership, for-profit consortium has its roots in the Microsoft antitrust trial. Symbian was created because the leading phone manufacturers desperately wanted to avoid Microsoft’s desktop monopoly being extended to mobile devices. They didn’t want a dependency on high license fees, rigid requirements and poor code.

Well. Philosophy might be a grand way of putting it – it’s more of a fashionable buzzword. This is the idea of “multi-sided markets”, which when you get down to it, is really just a fancy way of describing cross subsidization. The case for a “multi-sided business model” was made in an economic defence of Microsoft’s strategy of bundling Windows Media Player with Windows in the EU antitrust case. So take a bow, economist Richard Schmalensee, Microsoft’s favourite economist. It was Schmalensee who in the US antitrust trial argued that the true price for Microsoft Windows should be around $2,000 per license. The idea that emerged from the EU trials was that WMP created a “platform”, and therefore consumer benefits. The idea here is that Nokia, which now entirely owns Symbian, will cross-subsidize the market by giving away the Symbian OS, er … platform, royalty free.

So it’s a triumph for the new science of “Freetardonomics”.

If the ploy is successful, Symbian becomes the go-to OS if you want to make a phone. You just pick up the software stack for free. Nokia benefits from the halo effect. But it’s also fraught with problems, the first of which was apparent by lunchtime today.

The most damaging problem is that Symbian’s licensees may have no desire to make Nokia stronger now that it owns the operation 100 per cent. Because it dominates the “platform” already by market share, the playing field tips steeply towards Finland. Why bother joining – to make the market leaders even stronger?

This seems to be the logic behind UIQ’s decision to clamber out of the “eco-system”, even before the formal press conference announcing its commitment to the happy-clappy “Foundation” had started.

UIQ is today dismissing over half of its staff: more redundancies will follow, we understand, once negotiations have taken place.

The “Foundation” may also prove to be an expensive liability for Nokia. The whole idea of “multi sided markets” is susceptible to a change in the regulatory fashion. Should Nokia be regarded not as a benevolent platform provider but as a dominant player – not difficult given that rivals such as Ericsson, Siemens and Motorola have a habit of spontaneously self-destructing – then life could get very difficult indeed. A change in the regulatory weather could see the venture catch a chill.

The smart in smartphone disappeared

The smartphone wars once devoured a great deal of attention and energy, particularly during the long PR war that took place in the first four barren years – from the birth of the venture exactly ten years ago, to the first mass market consumer handset appearing in 2002. Today, apart from a few gadget fans, nobody really cares any more.

That’s because the smartphone segment of the phone market is far smaller and less important than any of us thought at the time. Symbian has powered 200m phones to date, far more than any other high-end OS, but that’s built up gradually over seven years. Back in 2000, the predictions were for 400m WIDs (as Symbian called them: Wireless Information Devices) by the mid-2000s.

Even five years ago, it was apparent this was a war in which there would be no winner (see Smartphone wars over, Symbian and MS both lost?).

How did “smart” phones lose their luster? While they were bigger, slower and harder to use than phones based on older closed platforms, they didn’t offer the value that persuaded most people to put up with the pain and use the extra “smartness”. For example, Google Maps runs on any midrange phone today very capably – and like Google itself, it does the job well enough.

But even then it’s doubtful that Nokia and Symbian executives would have opted for Exile in Freetard Street, had it not been for two competitive factors. One is the diminishing cost of smartphone OS licenses, which reflects their market value. Google is giving away its smartphone OS, Android. As Bill Ray correctly points out today, that makes Android utterly pointless ().

There’s another factor, too. Symbian’s founding CEO, Colly Myers, the father of the OS formerly known as Epoc, used to talk of the “enchantment” factor. Tech wizardry wasn’t enough, he said, but the devices had to charm.

It’s largely Nokia that must be blamed for failing to make Symbian phones remotely “enchanting”. Nokia’s UI is cumbersome (Symbian doesn’t do UIs); the hardware was for years underclocked, making it slow. And Nokia’s legendary marketing has appealed to nerds, outcasts and social freaks – and been guaranteed to confuse everyone.

Today it’s the iPhone which has the enchantment factor. How could it not – it comes straight from the Dream Factory. And Apple must now see a clear road ahead for world dominance.

Symbian has done everything its original designers asked of it – a twenty year lifespan is not bad at all. But it’s now Apple’s business to lose

Over at Telco 2.0, the blog of analysts STL Partners, we learn that networks who partner with Apple must install Apple gear at the data centre to support its services – specifically, the Push Notification service that wakes up the Jesus Phone. Forget the revenues from sales of extra server gear – the key point is that Apple now sits in the middle of the data stream, capturing the customer’s data. The analyst outfit describes the iPhone as a potential “poison” for the networks.

STL wrote this week:

“Apple can data mine the application message stream — and it’s been a telco’s dream for years to mediate such flows.”

Nokia sell two out of every five mobile phones in the world, and they’ve ruled the roost for a decade now. But they’ve failed to convert that market clout into mobile data revenue – for themselves, or the operators. When you discount application-specific services such as RIM’s Blackberry Connect and new music services such as Omnifone’s MusicStation, mobile data use is negligible.

Because the iPhone makes mobile browsing more of a pleasure than a pain, for the first time, this is changing. And because de facto standards are defined where the people are, this means Apple, not one of the traditional incumbents, could call the shots. Or as the STL boys put it:

“… it doesn’t take massive market share (stimulated by the new low price point) for the iPhone to de facto become the mobile web.”

So, sorry, Nokia and Microsoft – you may have turned out to be the Osborne and the Altair of the 21st Century.

And bang go the commercial prospects of turning the bitstream into money:

“You don’t have to be too bright to realise that one of the most likely things to be pushed to a phone in future is an advert, mediated again by Apple,” they add.

STL tempers this possibility with the very sensible point that the iPhone has may have limited it appeal. Apple has yet to prove it can break out of the niche in which it reigns supreme. Indeed the biggest threat to mass market adoption of the iPhone may yet be Apple itself, by refusing to add a numeric keyboard or hard-QWERTY keyboard. But if there’s growth at the high-end, it will reaped by Apple, with its superior, easier to use technology which is now sensibly priced.

Yet the mere prospect of Apple sitting in the middle of their network, capturing customer data must make a mobile operator’s blood run cold. They’re unlike to accept a cuckoo in the nest – but who can help them?

Alas, the operators’ strongest potential ally has decided to have a mid-life crisis. That’s Nokia, of course, which is in a stronger position than ever after acquiring most of Siemens’ COM division in 2006. Nokia can help with both back-end and devices, but it’s decided that it, too, wants to shaft the operators. It’s splurging on services such as music and maps that cut revenue opportunities for the networks.

As STL wrote last year in an excellent summary:

“The way Ovi has been positioned at its announcement could prove to be a mistake. It will confound Nokia’s efforts to address and bring to market answers the most important unmet user needs. Ovi annoys Nokia’s most important go-to-market partners for any new and better personal communications services.”

Just when you need a friend…

When, a few years ago, I described Sony and Nokia as the only two companies who could call the shots in consumer electronics, a few eyebrows were raised. Sony, yes. But Nokia?

I anticipated that success in smartphones would be a beachhead into a bunch of other consumer electronics markets. Few noticed that Nokia already made TVs and set-top boxes. It had just launched a games console, too.

In fact, Nokia had began planning for “mobile multimedia convergence” in the mid-1990s, when it began sniffing out a next-generation operating system – it eventually opted for Psion’s Epoc, which became Symbian OS. For years Nokia put its best brains on the task – and sat back and waited. And waited.

Believe it or not, the iPhone has become a stealth hit over on this Soggy and Septic Isle. But this should come as no surprise to anyone familiar with the psychology of the British punter.

When the iPhone arrived it here it was greeted with studied indifference. You’ll recall that Carphone Warehouse and O2 stores stayed open late for a stampede that never came.

The splashy launch – and the glee at O2’s discomfort that followed – only seemed to confirm the view that British punters congratulate themselves for being immune to imported hypes.

But this has been overtaken by another aspect of consumer psychology here. More than anything else, British punters love boasting about a bargain. Like tea, it’s something that unites all classes. Even if one must lie about the “bargain” that isn’t a bargain at all – and has just been bought on an already over-extended credit card.

So we shouldn’t be surprised that shortly after Apple’s UK retail partners slashed the price of the 8GB by £100, it had sold out.

Bargain. Innit?

This also confirmed that the iPhone has been more successful as a word-of-mouth hit than it was as sensation-of-the-month. I’ve noticed that the people sniffiest about the product are people who have yet to see a friend using one. The huge and incessant advertising campaign from O2 and Apple may actually have obscured, rather than illuminated, two facts: it’s a pretty decent product, and that people like to use it.

Satisfaction ratings for the iPhone after months of use are far higher than for any other phone – which suggests it’s passed the real world test. For sure, it isn’t perfect – but most of what it does, it does superbly. And yes, it really has got grown men stroking a piece of glass in public.

So we can surmise that so far, this is a piece of kit that has been held back by the exclusive distribution model (the exclusive carrier deals) that Apple has preferred. Fortunately, we’re already seeing this crack, with non-exclusive deals signed in Italy, India and Australia. This means that means rival operators in each market will be prepared to lower the upfront cost of acquiring an iPhone: remember that when you get a phone, you’re essentially getting it on a hire-purchase agreement at a subsidized price, paying for it over the period of the contract. Which means an iPhone will no longer be prohibitively expensive.

Let’s contrast this with Nokia’s fortunes.
Can Nokia still cut it?

When, a few years ago, I described Sony and Nokia as the only two companies who could call the shots in consumer electronics, a few eyebrows were raised. Sony, yes. But Nokia?

I anticipated that success in smartphones would be a beachhead into a bunch of other consumer electronics markets. Few noticed that Nokia already made TVs and set-top boxes. It had just launched a games console, too.

In fact, Nokia had began planning for “mobile multimedia convergence” in the mid-1990s, when it began sniffing out a next-generation operating system – it eventually opted for Psion’s Epoc, which became Symbian OS. For years Nokia put its best brains on the task – and sat back and waited. And waited.

Then there’s another factor: Smartphone Apathy.

I first drew attention to this almost two years ago – when it was evident that Nokia’s vision of convergence was in a lot of trouble. As I wrote in Whatever happened to … the smartphone?.

The smartphone had found a niche with enthusiasts, but most of the potential of an open, flexible device with lots of third party software was ignored by most of the people who had one. Nokia has the volumes in the smartphone market, but it hardly matters.

Pundit Dean Bubley recently drew attention to just how indifferent the public is to this prospect.

All of which must make long-time Symbian veterans wince – it’s not their fault, after all, that their dominant customer keeps churning out products that fail to excite the market.

My particular favourite example of how the iPhone succeeds where Nokia’s S60 fails is their respective Maps applications. With the iPhone, you start typing a name and it will assume that it’s the name of a contact with an address that you’re after. With a minimum of keystrokes, you’re away. It’s so obvious. Yet despite a €7.7bn acquisition of the world’s leading map provider, Nokia still doesn’t provide this deep level of integration, and in keeping with the Spirit of S60, simple things are hard to do.

There’s another reason Nokia is weak where it should be strong.

What are they smoking in the Strategy Boutique?

In a recent blog post titled Nokia goes for 1% market share in the US, analyst Michael Mace gave a damning overview of Nokia’s marketing. As we’ve noted before, this is designed to win over gadget bloggers in focus groups, but looks shockingly bad to your ordinary civilian.

Michael takes apart the “Open to Anything” advertising campaign -

“Once again, Nokia is communicating that its users are freaks and morons, which in the US is not the way to build a loyal following. Nokia has a long habit in the US of positioning itself as the preferred phone of people who lack social skills.”

One great example of this is the “Jealous Computers” site for Nokia’s Nseries phones. This purports to show victims of “attacks” by jealous laptops. Trebles all round at the ad agency.

But of course, laptops aren’t sentient, and don’t attack people. So one must conclude that Nokia Nseries owners have a fetish for self-mutilation:

We’d never thought of “Total Cost of Ownership” quite like this before. While this may go down a storm with the Emo kids, it’s not the way to sell a mass market consumer device. But because it’s dependent on closed feedback loops, or what is fashionably called an “information cascade”, Nokia seems unable to accept this.

(For example, Nokia’s feedback tells it that the N95 is a hugely well-loved phone – but real feedback suggests otherwise. Only a recent flurry of activity by fanboys at the O2 site has dragged the N95’s rating up above mediocre.)

3G prospects

So Apple has simply stepped into a market which was ailing through customer indifference, and rejuvenated it. How will the rivals fare with the imminent launch of the 3G iPhone?

Ominously for the established players, Apple is loosening the carrier restrictions which have held back adoption. Reports suggest it may also lower the price of the older model, to further stimulate the market. All of which means the iPhone is a bigger threat than rivals have realized. When the iPhone is priced similarly to the competition, the quality simply blows them away.

Sony Ericsson, whose investment in UIQ has given it a far richer and friendlier interface than Nokia’s cumbersome S60, looks well placed to capitalise on the renewed interest. It’s given a little bit of “touch” to its new phones, but focussed on how the touch UI can help do a couple of things very well. (Page down to the promo videos, here, and you’ll see what I mean.) But SE has only two UIQ phones announced, so far.

While it’s reasonable to argue that “smart devices” may never become a truly mass market, and will remain niche, Apple has earned its leadership through sheer quality – making rivals looks stupid.

And along the way its strongest potential competitor, Nokia, has turned into a Sony – but not how I imagined. Sony was always a hothouse of viciously warring factions, far keener to kneecap each other than sock it to the competition. Just when the market needs a strong and coherent response, a similar fate has befallen Nokia.

The world’s biggest label, Universal Music, joined the “Comes With Music” initiative at launch last December, and Sony BMG joined last week. The Register has learned that Nokia must pay the wholesale per-unit rate for downloads over a certain ceiling – believed to be 35 songs per user per month.

Two key executives have paid the price, The Register understands. Ed Averdieck, formerly Managing Director of Nokia Music (and former MD of OD2, which Nokia acquired in 2006) left the company earlier this year. The other joint head of Nokia Music at the time CwM was announced, former shooting star Tommi Mustonen, former head of Nokia Multimedia, has been given a “punishment that fits the crime”, insiders say: he has to negotiate the label deals personally.

“It will cost Nokia a fortune – it’s a reckless business move,” an insider and supporter of the concept told us.

While bloggers beat up Nokia for CwM because it used DRM – shrewder heads appreciated the concept as a potentially market-changing innovation. CwM is a loyalty program that offers users a “universal jukebox” – an attractive alternative to free unlicensed P2P – and gives Nokia a strong differentator to market leader Apple.

But the devil’s in the detail, and the major record companies are wily negotiators. While we understand that the per-handset royalty floor to Universal is only a third of the figures quoted recently (see Nokia’s Comes With Music Comes Without Profits) Nokia is left with a crippling liability, which punishes it for the very user behaviour it’s trying to encourage.

In its haste to compete with Apple, Nokia failed to study consumption patterns – leaving it footing the bill as users download freely.

With Nokia determined to sign every record label for the program – large or small – a similar marketing promotion that went horribly wrong will be remembered.

In 1992, Hoover promised buyers free flights with the promotion “Two return seats: unbelievable”, and was inundated with the response. It resulted in six years of litigation, cost tens of millions of pounds and senior executives their jobs. The parent company eventually offloaded the British division to a foreign buyer.

“Hoover were slow to realise just how much trouble they were in and soon set about making matters worse for themselves,” the BBC dryly notes.

Nokia continues to pursue the other two major labels – EMI and Warner Music, and the independent sector.

Bootnote: You can watch the keynote presentation “Free: the Past and Future of a Radical Price” to Nokia World 2007 by WiReD magazine editor-in-chief Chris Anderson here. Nokia unveiled CwM a month later.

Essentially, the deal bundles digital music for “free” with a Nokia phone. You can acquire unlimited songs for a year through the Nokia Music Store, then keep the music you’ve acquired if you don’t want to continue the deal. You’ll be able to play the songs on a PC (alas, not a Mac or Linux) and your Nokia.

By contrast, most music subscription services on offer today time-bomb the music, so that when you leave the service, it dies. That’s fine if you think of it as a sort of “cached” on-demand radio, but not as a way of acquiring a permanent collection; it’s proved unacceptable to consumers, who are used to keeping the music they’ve acquired for life… or until they’re burgled, or the house burns down.

In other words, it’s a loyalty program for Nokia customers, with music as the bait.

Instead, Nokia conceives of certain usage rights as a value-added extra – including the ability to burn CDs. The thinking is that most people who burn a CD do so for the car, and are prepared to pay. It’s a risky strategy, though.

First things first: the music is now “free”. At least one corner of the music business appears to have become aware that it’s already competing with free unlicensed music – the wild world of Rapidshare, Torrents and blogs – that’s ever improving in quality and ubiquity, and that it’s unable to stamp out.

As such, the Nokia Music deal compares favourably with the phone carriers’ service of choice, Omnifone’s Music Station, which offers the “universal jukebox” for a subscription fee, which the network carriers may choose to absorb, or not. With Music Station, your music expires with your subscription.

It also means Universal is blessing a significant rival to its own (as yet unannounced) subscription service, TotalMusic.

One year ago, Universal agreed a controversial $1 per device royalty with Microsoft for its Zune music player. This prompted howls of outrage from anti-copyright campaigners, who claimed it was a tax on music they’d already paid for, and that the tax would distort the market and hamper innovation. Now, the world’s most popular consumer electronics device manufacturer (by volume) is voluntarily absorbing the royalties. That’s quite a remarkable turnaround.

We pointed out at the time that songwriters and composers might see little of the device royalty at the end of the day – despite Universal’s promise to split the pool 50/50. We trust our friends at ASCAP and the MCPS-PRS Alliance will be ensuring that publishing royalties aren’t overlooked.

Those gotchas in full

The devil, as ever, is in the details, so here’s one that escaped first-day reports.

Intriguingly, Nokia is seeking to make a little extra money from this great music giveaway by charging for usage rights. One of those extras is the “right” to burn music to a CD. No fee has been set for this right yet – we’re still a long way from launch in the second half of 2008.

A few years ago, we thought DRM was a format scam: a way for the music business to get us to buy music we already owned in a different format, like the transition from vinyl to CD. Is it now thinking of charging for usage rights we already have?

Probably not.

A source close to the deal was keen to point out, however, that the trend is to inexorably move away from DRM. The market has spoken: take-up of DRM-encumbered music services is sketchy. Amazon has already made a big impact by selling DRM-free music. If Universal and other labels are banking on technologically-enforced restrictions as the basis for new tiered-service business models, then that window will close fairly shortly.

Another drawback is that it’s limited to one PC plus one device, and the device is going to be one that Nokia decides is fit for purpose. Today, only three phones support the Nokia Music Store, and only support it to varying degrees, but it’s still early days.

Omnifone yesterday put a brave face on the announcement, but it can take comfort from the fact it offers a broader service with greater reach. MusicStation runs on 70 per cent of new mobiles.

“We are delighted to hear Nokia intends to embrace and develop its own version of the unlimited music download model, which we launched back in February 2007,” said Omnifone CEO Rob Lewis in a statement. Omnifone also reminded everyone that it offers music from all four major labels, not just from Universal. “There is no doubt carriers will want to ensure… that these services are delivered on the widest range of handsets possible so that data networks are monetised as effectively as possible, and consumers can have as much freedom as possible when choosing a device.”

Lewis was reminding carriers that Nokia and UMG are cutting them out of the loop.

Selling an abstraction like freedom is hard though, and Omnifone will be aware that if network operators don’t absorb the cost of MusicStation, customers can turn to free, legal licensed music. That, Omnifone seems to be suggesting, is a price they may have to pay in the short-term, in order to gain long-term value.

There’s no denying that the Nokia UMG deal sets an important precedent: we expect music to appear free. Now they’re prepared to offer it for free. That’s not an enviable position for any business to be in, but that’s the price that sound recording owners are paying for not facing up to the challenge of digital networks ten years ago.

Interesting times lie ahead.

WMG says Mosh is a hotbed of copyright infringement. Nokia has responded by saying it employs humans round the clock, as well as using Audible Magic software to weed out unlicensed content. Warner sources have told Billboard that the two sides are far from a deal, and that litigation is a possibility.

Nokia launched the fully buzzword-compliant “social media” site back in August, we reported here, prompting reader Pascal Monett to hail it “a Nokia-centric happy slapping database”. In June, even before the public “beta” launch, we’d received emails pointing out cracked applications were being freely traded.

But unlicensed music isn’t really in evidence; it’s buried beneath mountains of user-generated crud. Much more in keeping with the tone of the site were gems such as “conservative party i love you” and “you-fat-bastard.mp3″: material at the vanguard of the User Generated Content revolution.

No surprise there, then.

More puzzling is the question – what on earth was Nokia thinking when it launched the file-sharing site?

It looks like another Dad-at-the-Disco attempt from a company so desperate to “get” the internet, it leaves common sense behind. Mosh would be a disaster even if it was never tainted by copyright infringing material.

Nokia has long been regarded as a soft touch by California technology evangelists and consultants. Now it has created a feedback loop for itself by only listening to buzzword-spouting bloggers.

Having to choose between Motown and “you-fat-bastard.mp3″ is just the sort of reality check Nokia needs. Perhaps it can bring the space cadet tendency at Nokia back down to Earth.