Nokia faces a crippling financial bill for its strategy of bundling free music with handsets, which will give users unlimited song downloads with Nokia phones.

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.