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iPod Killers?
U.S. wireless operators aren't going to cause an overnight sensation in music. Their first offerings are too expensive and clumsy to spark strong demand. Yet within a year or two, the operators have a real chance of giving the MP3 crowd a run for its money. The phone companies have a track record of refining their offerings until they attract the mass market. Verizon and its brethren have traditionally overpriced services such as broadband, long distance, and even cellular service and then lowered prices later. That's likely to be the pattern in music, too. "Anyone who doubts Verizon's capability, I would just say, 'Watch us,"' says Strigl.
The wireless companies are coming from far behind in setting up their music stores. Apple spent years refining its iTunes site and already has sold more than 300 million songs. Yet the wireless companies may have one advantage if they compete against iTunes on price. Because they already bill mobile customers each month, they wouldn't have to pay credit-card charges to Visa or MasterCard. That's not much of an edge over iTunes when customers buy a $9.99 album. But if they buy single songs for 99 cents at iTunes, the fees total a significant 17 cents to 20 cents. Bottom line: Verizon, Cingular, and Sprint could end up lowering their prices to $1 a song and still make more profit than Apple does. "Business models will absolutely change," says Richard S. Siber, CEO of wireless consultant SiberConsulting.
Add it up, and Apple is facing what looks like the most serious threat so far to its digital music dominance. Of its trio of devices, the iPod may be the least affected. Its hard drive of as much as 60 gigabytes, or 15,000 songs, makes it a music aficionado's dream, and no phone can match it. The iPod mini and Shuffle are more vulnerable, since their storage is well within reach of a phone's capabilities. Some experts are convinced mobile phones will become the primary devices for carrying around tunes. "It's not a matter of if, it's a matter of when," says Scott Horn, a senior director at Microsoft Corp., which sells software for phones and music players.
Why are telecom players looking to steal some of Apple's thunder now? Technological advances in storage, compression, battery life, and wireless networks are making it easier to receive and store high-quality music on phones. Korea's Samsung Electronics just introduced a phone with a 3-gigabyte hard drive, enough to store 1,000 songs. A 10-gig phone could hit the market within two years. And the future looks wide open. Research firm Strategy Analytics estimates that in 2008 half of the 860 million cell phones sold will be able to store and play song, up from 8% today.
Wireless operators have seen what a gold mine music can be. Ringtones, the snippets of songs you can put on your phone to customize your ring, have become a huge hit. Operators charge customers $1 to $3 per download for a few bars of a song and keep most of that for themselves. Ringtone revenues have hit $5.8 billion, and that's expected to reach $9.4 billion in 2008. "People are thirsty for music," says Combs. "It's a way to express themselves and their personality." The hip-hop mogul is currently exploring the launch of a wireless music services company targeted to youth.
The ringtone boom has made the record labels enthusiastic supporters of the wireless companies. "Carriers are a new kind of retailer with massive reach," says Eric Nicoli, chairman of EMI Group PLC, one of the four major music companies. "Plus, they have a competitive advantage over online services because their consumers can truly make impulse purchases on their phones."
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