By Michal Lev-Ram
May 5, 2008

By Michal Lev-Ram

Apple’s iPhone may reign over the fledgling mobile music market in the United States, but in the rest of the world Nokia is No. 1 on the hit parade.

Last year alone, Nokia

sold 147 million music-playing phones worldwide, while Apple’s (AAPL) sleek touchscreen has sold 5.7 million units so far this year. And although the iPhone is now the top-selling music phone in the U.S. market, it doesn’t even make the top five in Europe where three of Nokia’s music-playing handsets are best-sellers. Now the Finnish phonemaker plans to launch a new service later this year that will let people download as many songs as they want for a limited time.

Unlike the iPhone’s pay-per-track model, Nokia’s new “Comes With Music” plan will offer several handsets that include a year’s worth of unlimited music in the cost of the phone. Once the year is over, subscribers will be able to keep their existing tracks on their phone or PC, and Nokia says they’ll have several options of extending their “Comes With Music” membership without necessarily having to upgrade to a new device. The company is still mum on what those other options may be, though it’s likely customers will have to start paying a subscription fee to keep the unlimited downloads service.

“The track-by-track purchase methodology was cumbersome to people,” says Liz Schimel, head of Nokia’s music business. “Consumers were looking for a more seamless way to access a lot of content.”

Subscription-based, all-you-can-listen-to digital music models have been around for a while. Companies like U.K.-based Omnifone and Rhapsody offer similar services and for years rumors have circulated that Apple itself will launch a flat-rate, unlimited version of iTunes. But Nokia is the first mobile giant to turn away from the a-la-carte model of selling mobile music, and, unlike other existing subscription-based services, its will allow people to keep their tunes on their phone and PC even after their subscription expires.

Of course, while customers won’t have to worry about losing their music library, they also won’t be able to transfer their songs to a new device unless that new device is another “Comes With Music” Nokia phone.

The company plans to launch several compatible handsets, as current Nokia music phones won’t work with the upcoming service. It’s not clear how much built-in memory those new phones will have, but one of Nokia’s most popular multimedia phones on the market today is the N95, which, like the iPhone, comes in an 8-gigabyte version.

Lucky for the Finnish phonemaker, analysts say content providers are eager to experiment with new ways of getting their music onto cell phones.

“They [content providers] want to at least try to shift the center of gravity away from iTunes and Apple,” says Mark Donovan, a senior analyst with mobile research firm M:Metrics.

Two of the world’s largest music labels – Universal Music Group and Sony BMG – have already committed to “Comes with Music,” and the company expects more will sign on before the new service launches in the second half of this year.

Nokia won’t disclose the details of the new business model, or say how much the “Comes With Music” devices will cost. Some media reports have suggested the phonemaker is paying $35 to Universal alone for each handset it sells. With more labels expected to join the partnership, that could end up cutting into Nokia’s profit margins, though M:Metrics’ Donovan says he believes the company has figured out a model “that has legs.”

“The idea that they would pay Universal $35 a handset doesn’t smell good to me at all,” says Donovan. “But of course the devil will be in the details.”

Schimel, head of Nokia’s music business, says the company put a lot of energy into crafting a model that makes sense for everyone involved – the music labels, customers, carriers and Nokia itself. The result, she says, will be able to compete with lots of players on the marketplace, including Apple.

“The mobile industry as a whole has enormous potential in digital music but up until now it’s only been unlocked to a limited extent,” says Schimel, who would not disclose the specifics of the “Comes With Music” business model.

One thing Nokia has been clear about is that music and other services are an important part of its overall strategy. In 2006 the company acquired digital music player Loudeye, which enabled it to launch a pay-per-track mobile music store (similar to what’s currently available on the iPhone), now available in nine countries.

But it’s Nokia’s “Comes With Music” service that has the potential to disrupt the prevalent iTunes way of selling digital music – at least when it comes to mobile downloads.

Despite Apple’s dominance in MP3 player sales, Nokia’s got a global headstart when it comes to the mobile phone market. It’s got 40% of the global handset market and is especially strong in regions that have been quick to embrace mobile content, including China and Europe.

Of course, providing a viable competitor to Apple’s iTunes means succeeding in the U.S. market as well. Currently, Nokia has just 7% market share in the United States, and its total North America sales accounted for only 2.6% of its overall, global revenues.

Nokia’s Schimel says although it won’t be one of the launch markets Nokia has every intention of eventually bringing its “Comes With Music” service to the United States.

But it’s possible Apple will be pressured into change its tune — and offering a subscription-based iTunes service — long before that happens.

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