Nokia Barges into Mobile Services

Ever since the mobile-phone powerhouse started the ringtone fad, it has been seeking a way to extend its reach. The new Ovi service is a marketplace of content

by Jennifer L. Schenker

Long before Apple (AAPL) introduced iTunes or dreamed up the iPhone, Nokia (NOK) created a Web portal to let owners of its phones download snippets of music known as ringtones. It was the year 2000, and Nokia could see that selling content and services along with its hardware would be a smart extension of its business. But the gambit, called Club Nokia, irritated mobile operators, who wanted to run such services themselves—and who were also Nokia's biggest clients.

The Finnish company backed down, but never quite gave up. On Aug. 29, at a London press conference in a converted fish market alongside the Thames, Nokia's chief executive Olli-Pekka Kallasvuo unveiled plans to launch a slew of services for mobile users—initially in Europe and Asia, and perhaps later in the U.S. Called Ovi (Finnish for "door") the gateway to music, photos, maps, and other content will be available starting later this year.

This time around, mobile operators may be willing to join in. The scheme includes an online music store rivaling Apple's iTunes, aimed primarily, but not exclusively, at the 200 million music-capable Nokia mobile phones already on the market. It also features an interactive multiplayer game service accessible to the 40 million Nokia Nseries phones now in use. And early next year, Nokia will add a service that lets consumers swap personal photos, videos, and audio.

Devices Are Not Enough

The road map announced in London is an effort to weave all of Nokia's software and services into a seamless package. Researchers have been toiling for years in Nokia's labs on such technology, and more recently the company has been on a furious shopping spree to beef up its portfolio. In October, 2006, for instance, it bought an iTunes rival called Loudeye, the largest independent music distribution platform, for $60 million.

The same month it snapped up gate5, a maker of navigation software for mobile phones, and in July of this year, it bought media-sharing site Twango—both for undisclosed prices. No other handset maker has made a comparable effort to profit in mobile communications by distributing content, not just hardware. "Devices alone are not enough anymore," says Kallasvuo. "Consumers want a complete experience."

Europe's mobile operators are paying close attention because their own efforts to launch digital music stores and other data services have largely failed. Yet without such offerings, there's no way subscribers are going to run up monthly data charges as high as the operators are counting on. "Mobile operators around the world have invested a fortune on networks, services, and marketing, and it has been a gigantic disaster," says John Strand, head of Copenhagen-based mobile consultancy Strand Consult. "Not a single one has succeeded with a 'walled-garden' strategy," which directs users to a closed set of services rather than to the wide-open Internet.

Help for Operators

So where do Europe's mobile-phone surfers spend their time? Surveys show they visit the same sites popular on the Internet: Rather than flocking to offerings created by mobile operators for news, finance, or search, they go to trusted brands such as Google (GOOG) or Yahoo! (YHOO), says Mark Newman, chief research officer at Informa Telecoms & Media (INF.L), a London technology consultancy. And they rarely download music over the airwaves, as operators had hoped. Most prefer to "sideload" music to their phones from their computers.

Britain-based Vodafone Group (VOD), the world's largest global service provider, provides a cautionary example. The company has sunk a total of $37.91 billion into third-generation mobile licenses, hoping to spur customers to use data services such as mobile music. But as of spring 2007, only 32.3 million of its 206.4 million subscribers used its Vodafone Live! portal. That leaves Vodafone and other mobile operators in danger of becoming "dumb pipes," or providers of generic wireless data access, unable to differentiate themselves from competitors or to profit by selling content.

Nokia says there are several ways it can help operators generate more revenues from mobile data. One is a location-based service it launched earlier this year, Nokia Maps, which comes preloaded on the high-end Nokia N95 phone sold by many of the world's operators. Users choose nearby points of interest on their screens, such as a coffeehouse, and the service gives back the address or a map. Operators have the option of handling the billing for this service in exchange for a cut of Nokia's content revenues. Nokia's new music, photo, and game services likely will be handled the same way.

Controlling the Screen

While mobile operators have every incentive to sign on to Nokia's services offerings, analysts still expect some resistance. Some of the bigger operators, like Vodafone and Orange (FTE), for example, are expected to balk at the idea of replacing their own music service with Nokia's. And although Nokia claims it has had "very positive discussions" with most operators, few are willing to comment on the new initiative.

Nokia's service push also puts it into more direct competition with Google and Yahoo. But while the Internet companies have strong brands, they don't have control over the phone's screen. Nokia, on the other hand, can bundle great services with specially tailored, user-friendly hardware. With close to a billion customers and its established relationships with hundreds of mobile operators around the world, Nokia looks to have a head start on marrying the Web world with the wireless world.

With Cliff Edwards in San Mateo, Calif.