July 1, 2004 12:00 PM PDT
Cell phones heading into iPod territory
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A glimpse of the future could been seen this week here at Sun Microsystems' JavaOne conference, where Motorola displayed its newest mobile phone, done up like a discotheque.
Increasingly, companies are designing mobile phones that can double as MP3 players, hoping to appeal to consumers who want to minimize the number of devices they carry.
A host of obstacles could prevent the advent of an all-in-one product. Technical considerations such as battery life and the storage capacity could pose problems. So could pressures from the record industry.
The sleek, candy bar-shaped E398 makes and receives calls like any other phone. But it also has a built-in MP3 player, vibrating stereo speakers, an oversize color screen for playing MPEG-4 video clips and rhythmic flashing lights.
This kind of device is still rare in the United States, but some say the E398 and models like it point to a convergence between cell phones and MP3 players. The appetites of music companies have been whetted by the near-$4 billion worldwide ring tone market, and cell phone download services are already beginning to launch in Asia and Europe.
"Music is portable, and what are wireless handsets but portable?" said Michael Goodman an analyst at The Yankee Group. "They see a great convergence in trends here."
Cell phones makers' drive to assimilate other products has been under way for years. Many phones now have calendars, calculators and other PDA-like organizational features. Video game features are the core of Nokia's N-Gage, and more and more phones are adding full video capability as well.
These moves have been spurred by wireless companies' need to find new sources of revenue to help defray massive investments they've made in the new "third generation" spectrum to allow more bandwidth for data services and ordinary voice calls, at a time when analysts predict that revenue from ordinary voice calls will plateau.
Music has been seen as a natural focus for convergence. Music files are small, and consumers increasingly want the ability to carry their music with them, a fact that wireless phone companies see as pointing in their favor.
A few wireless companies, including Sprint, began moving down this path at the peak of the dot-com boom, although that first generation of phones and services had little effect on the market.
More recently, wireless operators have begun working with companies such as RealNetworks to offer more advanced services, including access to streaming multimedia, and some downloads. The Treo 600 can play back songs downloaded from RealNetworks' music store, for example.
As cell phone makers edge back into the market, analysts say, they will need to make an aggressive push if they hope to make any headway. But real convergence--the kind where customers might forgo an iPod because they're buying a Motorola phone--is still some ways off, they say.
"Someday we'll get to the miracle iPod phone, but that day is not happening in the next 18 months," said Mark Mooradian, senior director for MusicNet, a large digital music service.
Clash of cultures
Some stumbling blocks are purely technical, having to do with details such as battery life and the storage capacity of phones. In addition, the ambitions of the wireless carriers and record labels to turn mobile phones into a wholly separate music market may also keep the devices apart for some time.
Additionally, much depends on the mobile service providers themselves, such as Sprint and AT&T Wireless, which are typically the ones to choose which phones consumers can use with their services. Their needs, as much as the demands of the consumers themselves, will help determine which design features find their way into the mainstream. Service providers are interested in supporting music, but they want to ensure that it makes them money, too.
"For people that really want to carry around 5,000 songs, I don't know if cell phones will ever have enough memory."
-- Steven Kanuff,
The problem for the carriers, Goodman said, is that the digital-music market is being quickly defined by companies such as Apple Computer, with its iPod player and iTunes Music Store. The emerging model is one where customers are used to the 99-cent download, and where music distributors are letting hardware sales subsidize the razor-thin profit margins made by the music services themselves.
Wireless phone carriers have a very different business. For the most part, they're used to having their services and content subsidize the hardware, the exact reverse of Apple's current model.
Moreover, they're already making considerable money by selling ring tones--essentially 15-second to 30-second snippets of songs that substitute for a traditional ring--for as much as $2.50 apiece. That could look less appealing next to a 99-cent version of the entire song.
At the same time, music services are emerging quickly for cell phones, particularly in Europe. On Monday, German wireless carrier T-Mobile unveiled a music service on the heels of similar efforts by British rival Vodafone and Europe-based online music retailer On Demand Distribution, or OD2. T-Mobile's service will sell abbreviated versions of songs, averaging about 90 seconds apiece, to customers for about $1.80.
That's expensive, compared with Apple's iTunes Music Store and other Internet music retailers. But industry insiders say European consumers are less tied to their computers and therefore make a more natural audience for music on cell phones--despite the cost.
"Most multipurpose handset users in Europe want to listen to music, sync their addresses and make calls from one single device," said Michael Bornhausser, CEO of SDC, a mobile digital rights management company. "In the U.S., the opposite is true. The iPod's market is far more developed, while the multifunctional handset industry is less developed than what we see in other parts of the world."Mobile ambitions
The speed and character of the development of music services in both the cell phone and PC markets--and by extension, the role of cell phones as music players--will likely be strongly influenced by the desire of wireless phone carriers and record labels to keep mobile music a separate business as long as possible.
A song ripped from a CD or purchased from iTunes could, in theory, be transferred to a cell phone as simply as to an iPod. But some wireless companies and labels see mobile music as a different format altogether--and therefore an opportunity for more money.
Michael Nash, a senior vice president at Warner Music, says his company is already in discussions with its constituent labels about having studio producers create mobile mixes--such as the abbreviated 90-second or two-minute versions of songs used by T-Mobile-type download services--at the same time as the full versions of songs are created. This could help create a new market for music, in which people listen to PC-based and phone-based songs differently, he said.
"From our perspective, it is a much more desirable outcome to have the mobile channel and online channel be differentiated," Nash said.
Wireless companies like T-Mobile like that idea too, since it keeps customers on their network, using airtime and conducting transactions online instead of just using commodity voice minutes.
Much then is up to the designers at the big cell phone makers, who serve the wireless service providers as much as they serve the end users. Those manufacturers, for the most part, say they will create whatever that broad market demands. For now, it's a mix.
Phones need more memory and perhaps even a hard drive to meet the 200-song capacity typical of the average MP3 player in Europe. From a handset maker's perspective, such bloat is frowned upon, given the long-standing focus on keeping phones small.
"One hundred songs is more doable," said Adrienne Campbell, manager of marketing communications for NEC America, the U.S. telecommunications arm of Japan's NEC. "But consumers want it in their handset, sure; so it's a must-have feature."
Meanwhile, Nokia and others are using removable flash memory cards that hold up to 256MB, or several hours of music, as storage. These have proved popular with a certain niche, the company says.
"For people that really want to carry around 5,000 songs, I don't know if cell phones will ever have enough memory, Nokia spokesman Steven Kanuff said. "For people who don't want to carry two devices around, this is a good alternative."
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