Nokia acquires Loudeye: what tune is it playing?

Michele Mackenzie, Service Manager and Practice Leader

Nokia announced on 8 August 2006 that it is to acquire white-label digital music service provider Loudeye for $60 million. The deal is not expected to complete until Q4 2006. The press release states that 'by acquiring Loudeye, Nokia can offer consumers a comprehensive mobile music experience, including devices, applications and the ability to purchase digital music'.

The newly combined company may take either or both of two possible strategies:

• provide a fully convergent white-label service and extend Loudeye's current target customer base to wireless operators
• build a new Nokia-branded D2C music service offering end users of Nokia devices a fully convergent broadband/cellular service

However, when requested to clarify whether it planned a D2C service, offering Nokia branded music content, or a white-label service in line with Loudeye's current business model, the company declined to comment.

Building a fully convergent B2B model

With the acquisition of Loudeye, Nokia has acquired a strong, well-established company in the broadband digital music space. Loudeye is already a dominant player in this industry and has been successful to date in building a business based on scale and volume, which is critical in a low margin, nascent digital music industry. Loudeye also provides Nokia with:

• long-established music rights deals with major record labels and independent labels, in some cases for both online and mobile channels

Loudeye has a strong reputation already with the labels

• a proven white-label service and platform, and technological know-how in online digital music

the company fulfils many roles in the value chain, providing hosting, aggregation, DRM, payment facilities and dual delivery, as well as customer service and marketing if required

• an existing customer base in the online market, consisting of telecommunications providers and consumer brands.

Nokia of course brings the wireless expertise and the devices to the equation, which we believe paves the way for the end product of this merger to become a strong contender with Apple and its iPod/iTunes ecosystem. Optimised music phones such as the Nokia N91 or the Sony Ericsson Walkman series are marketed as music devices and are positioned more and more as replacement products for portable dedicated music players, which offer in addition wireless connectivity for over-the-air music downloads and interactive services.

The combination of the content, the platform, the convergent broadband/cellular channel and the device would position this offering as a strong contender to the iTunes (wireline) / iPod (offline) offering. And if it were a B2B offering, consumers would be able to choose their digital music service provider based on brand, music preference, price etc. Of course, whether it would all be compatible with other devices is another question. However, one disadvantage that Nokia/Loudeye have against Apple is that they can only match Apple's vertically integrated, direct-to-consumer business model by alienating Nokia's biggest customer segment - as we explain in the next section.

Building a new D2C brand

In the past, Nokia has been criticised by wireless operators for providing content direct to the consumer through its own portal. With such a strong consumer brand, wireless operators viewed Nokia as a threat to their own portal businesses, in which they were investing heavily. And as the (initial) buyers of most of Nokia's phones, they naturally resented what they saw as Nokia competing with its own customers.

However, a couple of years ago Nokia reviewed its strategy and took a much less conflicting approach to content. It phased out its own content portal and launched Preminet, a WASP-type service portfolio, which repositioned it as a B2B provider in the value chain.

But the Loudeye acquisition could stir up trouble again, this time in a content area in which operators are especially sensitive: music. It was notable that there was no mention in the announcement of the wireless operator or a B2B offering. Wireless operators that are currently investing heavily in launching wireless music download and streaming services will be understandably concerned if this is not clarified.

In order to launch a D2C music service over the air, Nokia would have to strike deals with the operators for wholesale data traffic. At the moment, many third-party service providers of rich media are prevented from entering the market for lack of such deals, because consumers will not pay heavy data traffic charges on top of the content fee to download over the air. Nokia could provide a sideloading service, but this really would be counter-cultural for a company whose business hinges on wireless-connected devices.

We believe that this would be a dangerous strategy for Nokia to take and would only serve to alienate its main customer base.

Michele Mackenzie is service manager for the WirelessMultimedia@Ovum advisory service and practice leader for Ovum's Consumer Practice. The WirelessMultimedia service offers strategic advice to over 50 clients. Michele has over seven years' experience in the telecoms industry, specialising in mobile communications and wireless Internet.