iTunes on Hold at Motorola

The gearmaker, Apple and the big telcos have yet to agree on how to split what looks like a juicy music/cell-phone pie.
By Scott Moritz ,

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) - Get Report

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.

Then there's Motorola. As the No. 2 cell phone maker, having sold 108 million handsets last year, Motorola would love to add another hot model to its lineup and make a run at No. 1

Nokia

(NOK) - Get Report

. The risk for Motorola is that Apple could severely restrict the music storage capacity on phones to limit Rokr's threat to iPod.

And finally there are the telcos like

Sprint

(FON)

,

Cingular

and

Verizon Wireless

, which look at music as one of the big revenue engines set to drive data service sales over newly upgraded networks.

The phone companies, which saw little or no revenue benefits from the camera phone craze, are leery of being left on the sidelines of another big trend. For example, phone makers like

Kyocera

introduced phones recently that have slots for flash memory cards designed to give users the freedom to pack their home music libraries into their phones.

But obviously Apple, Motorola and the telcos each have a key role in the iTunes drama, if only they could agree on the price of admission, say analysts.

"Melding products is easier than melding business models," says Yankee Group analyst John Jackson. "This is particularly true in the wireless space where, in this case, differences between Apple and Motorola's launch strategies are also subject to the whim of the operator."

An official with one of the bigger U.S. telcos says no matter what happens, the phone companies will not be left out.

"Sure, there's friction and competition between the two sides, but there will be ample, unique business for both," says the unnamed official.

One scenario, according to the telco insider, is that music phones could allow customers to make impulse song purchases. With new features like "song identification," users could hear a tune in a bar or mall and the phone would name the song and offer to download it.

Some analysts say telcos have also thrown around an idea to charge users a monthly iTunes premium as a way to collect some sort of toll in the music highway they aren't providing.

And some highly optimistic industry strategists say that telcos will eventually play a central role in the music phone business.

Operators, says IDC analyst Lewis Ward, will be "one of the key retail storefronts for music in the 21st century."

One thing not lost in all this is that Motorola seems to find itself in an odd place after years of strategic fiascos and product delays, says Yankee's Jackson: "For once Motorola has a product people want and carriers aren't ready for it."

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