iTunes on Hold at Motorola

The rise of the music phone suddenly has the players singing in three-part disharmony.

While all parties agree that music + cell phones = huge money, putting the elements together to everyone's satisfaction seems fraught with conflict.

The acrimony was on display last week when Motorola (MOT) rocked the annual CTIA wireless industry gathering by canceling the introduction of Rokr, its Apple (AAPL) iTunes phone.

Motorola originally said the iPod-inspired phone was ready but that company alone decided to delay the unveiling. Later, Motorola chief Ed Zander offered up the official line, saying that Apple actually prompted the delay so it could do a big launch when the phone hit the store shelves.

But industry insiders and analysts say the real snag in the iTunes phone rollout isn't a technical glitch, for a change -- but a case of unfinished business deals. It seems the iPod phone promises to be a big opportunity, yet none of the principals has figured out how to slice it.

"The official line has some degree of truth to it," says American Technology Research analyst Shaw Wu, "but the bigger reason is that carriers don't get any economics out of it as it stands now."

So let's diagram this debate.

In one corner there's Apple. The much-admired tech shop sold about 10 million iPods last year. Massive, to be sure, but nevertheless it's dwarfed by the 700 million cell phones that will be sold this year worldwide. To get a toe in the door of this market, Apple licensed its iTunes music library system to Motorola.

The risk for Apple is that Motorola's Rokr could cannibalize the iPod business. Also, the iPod crowd uses PCs to download music currently and may not want to buy songs a second time over their phones. So if the telcos push their hands and demand a cut of the song purchases, it could weaken Apple's iTunes music downloading business.