This column was originally published on RealMoney on Nov. 1 at 3:36 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Western mobile operators are stumbling out of the gate in the new melee among music distribution modes.
New music services from
in North America and
in the U.K. seem to be saddled with bizarre price points, and pressure from
iTunes and satellite radio may well prevent the Western mobile operators from emulating the smashing success of mobile music in Japan.
Considering the runaway success of iTunes and the satellite radio boom fed by the
rivalry, the leading Western mobile operators have been curiously slow to address the music distribution market.
We are only now seeing their first real music service launches. Major mobile operators seem chillingly tentative and out of touch considering how rapidly the mobile music distribution market is evolving and growing. In October, the record industry trade group IFPI reported that revenue from physical formats of recorded music fell by 1.9% to 11 billion euros (about $13.2 billion) during the first half of 2005. During the same time frame, the sales from digital music distribution vaulted by more than 250%, reaching 660 million euros.
Global sales are still clearly dominated by tangible stuff such as CDs and DVDs. But it's quite possible that the sale of physical formats have now begun a terminal decline. As the music industry realizes this segment is never going to show another year of revenue growth, it is likely to begin supporting digital distribution far more robustly than it has -- simply because it must.
The battle between distribution channels is going to get bruising in 2006, because iTunes and satellite radio had a surprisingly hot year in 2005. Mobile operators in both North America and Western Europe clearly thought they could afford to wait until 2006 to launch their music services in earnest. They have been engaging in elaborate negotiating processes with major labels and waiting for new network technologies like W-CDMA and EV-DO to become widely available.
But something unexpected happened in 2005 -- not one, but two new breakout music distribution modes had a banner year. Apple will sell more than 20 million iPods in 2005 alone. Sirius and XM Radio combined will top 8 million subscribers by the end of 2005.
These delivery modes are not identical with mobile music distribution, which boasts anywhere, anytime downloads of specific songs. iTunes is anchored to PC-Internet, and satellite music can offer a ton of variety, but not specific tracks.
But both iTunes and satellite radio are gobbling up consumer wallet- and mind-share at an alarming rate. There is a limit to how much consumers will allocate for music consumption each month -- and the combination of iTunes and satellite is devouring much of that allotment before mobile music even gets off the ground.
A Confederacy of Dunces
The early word indicates eerie similarities between the music services offered by Sprint in the U.S. and mmO2 in the U.K.
Sprint has already announced a nosebleed price point of $2.50 per song. mmO2 is now being rumored to launch its service at 1.50 U.K. pounds (which would amount to roughly $2.50). These are very, very steep rates considering that digital music distribution market is already being remade by half a dozen companies, ranging from Apple to
to satellite guys.
iTunes cost less than a buck a pop. A $13 dollar monthly fee for satellite radio access equals five songs downloaded via the Sprint service. If consumers begin to do some mental math, the high-cost mobile distribution of music becomes a very tough concept to sell.
Why do Western mobile operators seem so oblivious to the competitive threat from PC-anchored music distribution and satellite music services? There are four reasons I can think of:
Physical limitations: Mobile networks have been unable to support fast music downloads -- the previous mobile data upgrade technologies such as GPRS and 1xRTT were deemed too slow. Operators opted to wait until EV-DO and W-CDMA became widely available. This gave iTunes and satellite music a wide open field in 2005.
False lessons from Japan: In Japan, more than 95% of digital music distribution takes place via mobile networks. iTunes has not taken off in Japan the way it did in the U.S. and Western Europe. Consumers are far more used to downloading material to their mobile phones -- and far more tolerant of higher price points. KDDI's Chaku-Uta Full charges 100-400 yen (85 cents-$3.43) per full-length track. It's a hit in Japan -- but in the U.S., iTunes and satellite radio have taken off before American consumers are confronted by the prospect of $3 song downloads. The digital music well may already be poisoned in the West by relatively low-cost alternatives.Also, Japanese consumers have long been hooked on ring tones on a completely different level than their U.S. peers; some observers claim that Japan makes up 40% of the global ring-tone market. This made the transition from ring tones to music downloads far easier in Japan than it's going to be in America.
Faulty long-term projections: Obviously, predicting the precise scale of the success of both iTunes and satellite radio back in 2003 was very difficult. The mobile industry could not predict the arrival of tiny, portable satellite radios, the subscription levels of these services, the sheer volume size of iPods, etc. But the industry did lock in many of its long-term plans for 2006 back in 2003/2004. The decisions of not to push for mobile music distribution in 2005 was made back then -- and that radiated across decisions ranging from mobile phone platform design to capital expenditure planning of network upgrades.
Costs of building and running 3G networks: Operators have spent hundreds of billions of dollars to build the next-generation mobile infrastructure. They cannot admit that this spending may not create a massive flow of future mobile data revenue; pricing music low would be akin to an admission.
My point here is that in some ways, the mobile industry could not avoid missing the digital music boat. An aggressive focus on music distribution would have been warranted only if a lot of variables would have been known back in 2003; back then, investors were still demanding that mobile operators avoid capex spending and focus on conserving cash.
Cheap 'Housewives' on Rampage
The dangers inherent in losing the grip of mobile music distribution are obvious, particularly after Apple sold a million video downloads since Oct. 12. Apple is demonstrating how short the bridge is from music downloads to video downloads, the original high concept for 3G mobile services.
It is also locking in a low price point for popular content -- less than $2 for hot shows. If consumers begin to believe that this pricing reflects true value of video downloads, the mobile operators are going to be in deep, deep trouble.
Apple is now pricing popular, hour-long programming at $2, below where the mobile operators are launching their 3-minute
and others had better hope that the early interest in video downloads was just sampling by curious nerds. Otherwise, the long-term pricing plans for all mobile download content have to be ripped up by year's end.
I believe that the curious swoon in Verizon's share price this autumn has been partly driven by the Apple video scare -- and that the solid third-quarter numbers Verizon reported will assuage growing long-term mobile data revenue concerns for only so long.
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Tero Kuittinen is a Senior Product Specialist for Nordic Partners, Inc., a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, Inc., the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Nordic Partners, Inc., nor attributable to the company. At the time of publication, Kuittinen had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback;
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