Digital Media

Apple's iPhone and Android-based smartphones have both seen solid growth throughout the world this year, says a report released Wednesday by AdMob.

The iPhone's worldwide market share jumped from 33 percent to 40 percent over February to August, according to AdMob's "August Mobile Metrics Report," which tracked smartphone usage for that six-month period. AdMob, which serves ads for mobile Web sites and apps, bases its numbers on data from ad requests, impressions, and clicks.

Phones running Google's Android OS picked up a 7 percent market share by August versus only 2 percent in February, thanks to rapid gains in North America and Western Europe, said AdMob. Since its debut this summer, T-Mobile's Android-powered MyTouch has been a top seller in both of those regions.

(Credit: AdMob)

With the launch of the Pre, Palm's WebOS has also taken off, grabbing a 4 percent slice of the smartphone market in August.

Top smartphones across the world

(Credit: AdMob)

On the downside, older smartphone systems have witnessed a drop in market share, according to AdMob.

The global share for Nokia's Symbian OS fell from 43 percent in February to 34 percent in August. However, Nokia smartphones remain hot sellers, accounting for 12 of the top 20 smartphones tracked by AdMob. Nokia's N97 and 5800 XpressMusic units were the fourth and fifth most popular smartphones in the U.K. for August.

Research In Motion's slice of the market dropped slightly from 10 percent in February to 8 percent in August. Still, RIM's Blackberry devices accounted for three of the top 20 smartphones around the world. The Palm OS, running on older units such as the Centro, declined in share from 3 percent in February to 1 percent in August.

Finally, Microsoft's Windows Mobile also lost share, falling from 7 percent in February to 4 percent in August, according to the report.

AdMob sells and tracks ads on mobile Web pages and applications to more than 7,000 publishers. The company compiled the data for this report based on its analysis of more than 10 billion monthly ad requests from over 160 different countries.

Andy Rubin

Among all the companies fighting to grab a piece of the brightest star in computing--the smartphone--Google seems the least interested in taking the spoils.

Android, Google's mobile operating system, doesn't generate revenue for the company, and likely never will--at least in the direct sense. But Andy Rubin, Google's director of mobile platforms, thinks Google and the world will benefit from any device created with the intent of getting more people onto the Internet, and isn't shy about explaining why the open-source approach chosen for Android holds the most promise of reaching that goal.

Android made its debut in 2007, a few months after another computer with designs on improving the Internet experience on a phone--the iPhone--hit the streets as perhaps the most hyped gadget ever. Buzz has been slower to build around Android, but that could start to change as additional phones arrive that have a bit more pizazz than the G1, the world's first Android phone released last October.

Ahead of next week's Google I/O Developer Conference, where Rubin is expected to discuss future Android phones and goals for the software, he sat down with CNET News to review Google's progress thus far and share his impressions of what makes Android unique.

Q: How do you reconcile the goals of staying open with the need to offer carriers their own experience and the compatibility problems that may come as a part of that?
Rubin: Traditionally what's happened is the burden has been on the (phone makers) to be systems integrators. And what you get is kind of a lowest common denominator of functionality and usability because the software was actually developed by multiple parties, and nobody was really thinking holistically about the user experience.

It's (about) how do people expect these products to perform, and what are the various paces that a consumer will put these products through? No one company was thinking about that.

And so a huge benefit to this open platform is that it's complete, it's basically everything you need to build a phone. Sometimes the reason things fragment is because the platform is incomplete and people need to fill in the pieces. And when you fill in the pieces, you inherently have incompatibility.

It is possible to have a completely different user interface with a completely different look and feel but still be compatible. And that will be demonstrated.

There will be a couple of launches; we've generated a lot of interest in China. The use cases in China are slightly different in the U.S.; typically in China, because of the Asian input, people prefer a pen-based interface rather than a capacitive-touch based interface because they expect a stylus to be able to draw the complex characters. So the use case has completely changed but we have achieved compatibility.

How did the goal of Android evolve after it was brought into Google?
Rubin: The goal was pretty much the same, the business model obviously changed. Google's business model is deep into advertising, and so for Google this is purely a scale of the business, we just want to reach more people, and hopefully they'll use Google and we'll get the upside of the advertising revenue.

By the way, we're confident enough in our advertising business and our ability to help people find information that we don't somehow demand they use Google. If somebody wants to use Android to build a Yahoo phone, great.

Did you ever consider doing a phone? A Google phone?
Rubin: Yeah...I mean, it's funny, if you build one phone...I'd much rather be the guy that does a platform that's capable of running on multiple companies' phones than just focusing on a single product.

A single product is going to have, eventually, limitations. Even if that was two products that's going to have limitations. But if it's a hundred products, now we're getting somewhere, to the scale at which Google thinks people want to access information.

Getting back to business models, Google has a great business model around advertising, and there's a natural connection between open source and the advertising business model. Open source is basically a distribution strategy, it's completely eliminating the barrier to entry for adoption.

When Android was a start-up company, it was always a razor/razor blade business. The razor, the free thing, was the open-source operating system. In Android's original business model, the blades were basically provisioning systems that we sold to wireless carriers that had hooks into the open-source operating system. That was an unproven business model, I would say, and certainly the feedback I got when we were going for venture financing was that it was an unproven business model.

I was willing to give it a go, but then Larry and Sergey and Eric came along and said, "it's much more aligned with Google's core business and Google's business model, and you'll have a much easier time executing within Google." And retroactively, I agree.

Is this a market share play? Is this something where you want to conquer the mobile world?
Rubin: We look at it first from the scale perspective. The mission here is to organize the world's information and make it universally accessible and relevant. So the accessible part: think of a world in which you are somehow prevented from accessing the information you want. When I go to a hotel room and pay the $19.95 to get on the Internet and they have some firewall that doesn't let me get to my Exchange server, it makes me berserk.

Google doesn't sell Android, but hopes to encourage mobile Internet use to drive Web searches--and ads.

(Credit: Stephen Shankland/CNET)

I look at things--and Google looks at things--in (terms of) how could the landscape change in such a way that consumers who want to access Google services can't?

In that honest goal of not having consumers being blocked and allowing them to access information, it helps our competitors as well. What we don't want to do is disadvantage anybody by being the only person; we don't want to create any kind of separate structure where people can only access Google. And this is the definition of openness: it's not just open source, it's the freedom to get the information that you're actually looking for.

Why is this approach better what Apple or Palm is doing where they control the whole device?
Rubin: Controlling the whole device is great, (but) we're talking about 4 billion handsets. When you control the whole device the ability to innovate rapidly is pretty limited when it's coming from a single vendor.

You can have spurts of innovation. You can nail the enterprise, nail certain interface techniques, or you can nail the Web-in-the-handset business, but you can't do everything. You're always going to be in some niche.

What we're talking about is getting out of a niche and giving people access to the Internet in the way they expect the Internet to be accessed. I don't want to create some derivative of the Internet, I don't want to just take a slice of the Internet, I don't want to be in the corner somewhere with some dumbed-down version of the Internet, I want to be on the Internet.

Even if that comes at the cost of compatibility or UI advances? If you're going to be the Everyman phone, you're going to have to make some sacrifices at some point, right?
Rubin: I think that's yet to be seen. I think we've done a pretty good job. Again, we're talking about a clean slate technology that didn't exist a few years ago. So I'm actually thinking this could be a revolution.

Remember people used to trumpet "write once, run everywhere"? Well, I think we're actually there. I think when we start talking about the possibility of exploring things like Netbooks and car navigation systems, you have potentially different processor architecture types. You have Intel, you have ARM, set-top boxes have MIPS.

We have all sorts of different processor architectures, and the guys who are steeped in legacy have trouble addressing those markets with a single solution. I actually think Android is the potential single solution that can address all those markets, and it's new, it's revolutionary. It will change the game.

If this is a revolution, why haven't we seen more of these phones?
Rubin: It takes about 18 months to build a phone from end to end. What we wanted to do for our market entry was make sure that we had one successful showcase product to prove that the product was reliable and robust and ready to go. We chose HTC as our partner for that.

The forthcoming Samsung i7500, based on Google's Android

(Credit: Samsung)

At the moment we open-sourced, November 7 (2007), that's when a lot of these guys got their hands on it. We're still in that 18-month window of building products, and what you'll see coming up is a whole string of products.

What did you learn from Android 1.0 to 1.5?
Rubin: I learned that 1.5 was the product I wished was 1.0. The reason is it's a different business for Google: helping the industry build operating systems for their cell phones.

Because on the Web, you can iterate very quickly, and you can put things out in beta, you can fix bugs literally hourly. On cell phones you're blasting something in a ROM in a device that's in manufacturing where you did just-in-time ordering of all the parts and have inventory risk and everything else. Widgets are literally coming down a factory line, and if software isn't ready by the time they reach the end of the line they're going to drop on the floor and pile up. And that winds up costing a lot of people a lot of money. And if you don't get it right, you're kind of hosed.

What is going to dictate who wins and loses in this market? We all have different things that we may want in a phone. How do you try to be the Everyman phone and try to keep up with what's going on?
Rubin: We're trying to be something really unique, and I don't think anybody else is offering this. We put a very focused spotlight on openness, and openness is the means by which you get the product that you want.

Do people care (about openness)? I mean, the industry might care, the partners in the Open Handset Alliance may care, but do consumers?

It's an enabler. I'm not on some marketing campaign to educate consumers about what openness means. Actually, if you ask anybody on the street, you're going to get 10 different definitions of openness. The Symbian guys are going to be like "I'm open," and the LiMo guys are going to say "I'm open."

There's probably like a royal flush of openness, where you can lay your cards on the table and say (pointing) "open, open, open, open, open," it's the guy with the most open that's going to win.

I think we're that. I think that we have an open ecosystem, we have an open-source platform, we chose the right license, there are no viral aspects, it's absolutely 100 percent free, it's complete, it's everything you need to build a phone. When you add all that stuff up, all those ingredients, potentially--I think the jury's still out--we can make a really successful product.

The Web-based version of Gmail for the iPhone and Android phones brings a faster, more elaborate interface.

(Credit: Google)

Google has released a new Web-based version of Gmail that gives iPhone and Android phone users a more sophisticated version of the online e-mail service, including access to messages that's faster and that works even when offline.

Google demonstrated the Web-based mobile version of Gmail last week and announced its availability Tuesday on the Google Mobile blog. "You'll notice that it's a lot faster when performing actions like opening an e-mail, navigating, or searching. And if the data network drops out on you..., you'll still be able to open recently read messages and to compose over a flaky, or non-existent, network connection," said Google mobile engineer Joanne McKinley.

Although the new features are interesting, and I find them a big step up, what's significant in the bigger picture is that Google has shown just how powerful mobile Web browsers have become, not just for surfing Web pages, but for running Web-based applications. This mobile Gmail application doesn't have to be downloaded through Apple's App Store or Google's Android Market; it works after you point the browser to gmail.com.

The fact that one Web site can support iPhone and Android today and likely the Palm Pre tomorrow is significant for Google: by putting the application on the Web, the company doesn't have to create separate applications for different devices, as it has with BlackBerry and Android already but not the iPhone.

The relative universality of the Web app sheds light on Google's motivation for supporting Android, too. Google has a strong interest in making mobile devices first-class citizens on the Internet, a move that ultimately will open up new advertising possibilities for the search giant.

New features
The new version is much more elaborate than its predecessor--though not so elaborate that there are ads, as in the regular version of Gmail. Among the new features:

• Multiple messages can be selected then archived, deleted, and marked as read, unread, or spam.

• A floating toolbar--the "floaty bar"--travels with the page as you scroll through a message or through an in-box with selected messages, letting you take various actions without having to scroll to the top or bottom of the page.

• A search button appears at the top of the screen for easier retrieval of older messages. Previously it was buried at the bottom of the in-box.

But the offline access is what sets the application apart. The application stores e-mail messages on the phone itself using the still settling-down HTML 5 standard for Web page design and, in Android's case, using Google's Gears browser plug-in.

Faster e-mail
That makes messages readable while offline. But it also makes reading messages faster, since they don't have to be retrieved over the network as long as they've been cached on the phone. I noticed a very significant speedup in use--once I endured an initial wait for synchronization while messages were downloaded.

"Gmail for mobile allows common actions such as archive and send to be completed much more quickly than previous releases. The first time you visit Gmail, you may notice that the start-up time is a bit slower than usual. This is because we are downloading required files over the network. However, once the files are downloaded, subsequent launches will be more consistent regardless of connection type," Google told me in a statement.

The offline mode let me compose a message and push the send button; when network access was restored, the Gmail application took care of actually sending it without any intervention on my part. Also while offline, I could perform a search I'd done recently online, though a new search required network access.

The biggest missing piece in my quick test was the ability to add labels to messages. That's in the works, Google said:

"The new architecture of the Gmail web app will allow us to roll out new features much more quickly. The ability to add a label is not available at this time, but it's coming soon," Google said. That statement intrigued me, because Google's 2007 Gmail overhaul for ordinary browsers produced a modular design that permits extensive customization through Gmail Labs.

The iPhone and Android versions of Gmail worked identically once I installed Gears on my T-Mobile G1 after being prompted by a "get faster Gmail" invitation. The iPhone version was more responsive, and both had an awkward time showing HTML-formatted e-mail.

Asurion Mobile AddressBook lets Android users add new context to their traditional contacts list. The application was one of several for mobile devices on display at Demo 09.

(Credit: Asurion Mobile Applications)

PALM DESERT, Calif.--Last September, at DemoFall, I wrote that the most obvious trend in evidence at the technology showcase confab was the prevalence of iPhone apps. It seemed that at least a couple of dozen of the 72 companies at that show were putting at least part of their product offering on Apple's hit device.

Here at Demo 09, I figured that that ratio would jump, or at least stay about the same. But everything is smaller this time around--just 39 companies are presenting, for example, and there are hundreds fewer attendees--and as far as I can tell, the iPhone is hardly the hot platform.

Still, there are a number of companies who have turned to the iPhone--or other mobile devices--as the basis of their offerings. And in fact, a number of them have been grouped together into an afternoon session called "iLove my iPhone." But despite that title, only a few of them actually had dedicated iPhone apps.

Nevertheless, the companies grouped into this session--Coveroo, Promptu Systems, HAM-IT, Asurion Mobile Applications, bluBuzz and Skout--have some pretty interesting technology and services going on. How many of them will last is certainly unknown, but that's no different than any other product category at Demo or elsewhere in the tech business.

Maybe the most interesting of these applications, Asurion Mobile AddressBook, isn't actually available (yet) for the iPhone. For now, it's only on Android. As an iPhone user, though, I can still appreciate Android apps, especially ones that are smart and provide some all-new functionality.

The Mobile AddressBook is a cool app that brings a lot of fresh context to the staid list of names and phone numbers with which all of us are so familiar. Now, Android users will be able to link directly to the Flickr photo sets, Facebook pages, and Twitter feeds of those in their contact lists.

That's pretty cool--being able to go directly from the address book to, say, a friend's Flickr photos. But what's even better is that Asurion is making available an open API that will allow third-party developers to link other social tools to the contact list. That can be almost anything you can imagine. In addition, there will be what are called "smart contacts" for companies like airlines. So, you could have Southwest Airlines in your contact list, and click straight through from there to see upcoming itineraries or your account information.

Of course, Palm's Pre is built around much the same functionality--but as an Android app, and perhaps for iPhone later, this allows someone to get these features without having to dedicate themselves to Palm's new phone.

Another very interesting app on display is Skout, a social-dating service for a multitude of platforms, including the iPhone.

Skout requires users to sign up, but once they do, anyone using a compatible phone--the service requires GPS--will be able to see other members who are somewhere nearby. And for each person that pops up, you can see how far away they are and their profile and add them to a friends list.

Skout has an iPhone app that lets people flirt with any other user of the service that are nearby. It utilizes GPS to determine who is nearby, and has social networking features that combine well with more traditional dating service tools.

(Credit: Skout)

Whether this will actually help anyone find love is unknown, but the idea is interesting. There have certainly been plenty of mobile social applications in the past--remember Dodgeball? But by making this an opt-in system and combining GPS, this quickly becomes perhaps the most advanced such app I've ever heard of.

The next notable iPhone app was Promptu Systems' ShoutOut, a voice-to SMS system for the platform. This is pretty simple--it does just what it sounds like: it converts spoken phrases to text, which can then be sent out as a text message.

You might ask why you'd want to use such a system, but then think about how often you might want to send someone a text message while driving, and how unsafe doing that can be. In this case, you could simply hold the iPhone up to your mouth, say what you want to say, and then have the ShoutOut technology convert your words to text, which you can edit if necessary, and then send off.

I wonder how popular this will be, but given how dangerous it is to text and drive, I'm hopeful that something like this will become popular, since there's very little chance that drivers are going to stop trying to communicate just because they're behind the wheel.

And, ShoutOut does the same voice to text translation for Twitter, meaning that you can send a tweet from your iPhone without having to type it in.

A much more physical modification of your mobile device is Coveroo's laser-etching service.

This is just what it sounds like: A system that allows you to have an image etched on to the back of your device, be it an iPhone, a BlackBerry, an iPod or one of dozens of others. The company has a collection of more than 200 licensed images--from, say, "The Simpsons"--and it can also work with any custom image sent to it.

I've written about laser-etching services before; as a consumer-facing business, this started with Adafruit Laser Services, a New York company that would etch any laptop, iPod, or cell phone. And in many ways, what Coveroo is doing is not that much different.

In addition to selling personalized cell phone covers, Coveroo will soon offer custom-engraved laptops, as well.

(Credit: Coveroo)

But in some ways, it is. In particular, the licensed images gives Coveroo the ability to attract customers with very popular movie or TV show characters. In addition, the company is also hoping to license its technology to retailers in the hopes that places like Best Buy or mobile phone retailers will offer etching services to customers right when they're buying their devices.

Further, Coveroo is serving as a reseller of some devices, in the sense that customers can order a new phone, have it etched, and then sent to them.

At $10 to $50, this seems like an inexpensive (especially at the lower end) way to personalize a mobile device, or even protect it against theft.

A couple of mobile applications on display here at Demo I'm not so sure about are bluBuzz's Bluetooth advertising platform and HAM-IT's own customer and service provider matching service.

BluBuzz has built a system that allows companies to reach out to mobile device owners with instant offers--via Bluetooth. The idea is that for anyone who has signed up with the service, a special offer from a business is just a ping away. The location-aware technology can put out a signal that travels up to 1,000 feet. So, if, say, an ice-cream shop has a special flavor today, it can push out an ad to anyone in the area who has signed up for BluBuzz--who will then have the offer appear on their device.

It's an interesting idea, but I'm not sure how many people will sign up. Further, I can imagine it being somewhat annoying to have offers popping up on my phone from time to time, though the company promises that it will be unintrusive. Still, I remain skeptical.

Lastly, HAM-IT has built a system that matches service providers with customers looking for specific kinds of services. It's mainly not a mobile application, but does have a mobile component that will allow someone on, say, an iPhone, to say they're looking for an accountant in Boston, and any accountants in that city who use HAM-IT will offer up their business.

This seems like a service that few people will use on their devices, and I can't really see it being successful. It may be better on the Web, but in focusing on the mobile side of things, this looks less than essential to me.

MyScreen Mobile announced Thursday it is offering a version of its advertising rewards service for Google's Android smartphones.

Under the service, users sign up for MyScreen Mobile to receive targeted ads on their mobile phones. In exchange for viewing the full-screen ads, users receive rewards points for such subsidized mobile services as ringtones, mobile games, and gift cards.

MyScreen, which already has versions of its service for BlackBerry, Windows Mobile, Symbian, and Palm OS devices, is offering up a service that is akin to other Internet advertising incentive programs that have popped up over the years from the former AllAdvantage to the former CyberGold.

Google's name is on the lips of music industry powerbrokers.

The top music labels are seeing big music sales from Google's G-1 mobile phone.

(Credit: CNET Networks)

For several years, YouTube has been a disruptive force in film and television. Now music poobahs are wondering what designs Google may have on their businesses. Three of the four largest recording companies are in talks to renegotiate music-licensing deals with Google's YouTube. Sony Music is very near to inking a YouTube agreement, say my industry sources. Meanwhile, YouTube has reportedly started to generate "tens of millions" for some of the labels.

At the same time, the music store Amazon.com created on Android, Google's mobile-phone operating system, is leading to big music sales. Google declined to provide numbers or to comment for this story, but my sources say that the labels are "very happy" with Android's songs sales. In addition, Google could one day tap into a huge market by helping people discover and buy music using search, according to Susan Kevorkian, an analyst with research firm IDC.

For example, Google could post "click-to-buy" links when someone keys a song title into Google's search engine, Kevorkian said. The company could also conceivably use its search engine to suggest songs or alert people to local music events.

Incredibly, Google CEO Eric Schmidt, a lifelong technologist, could find himself becoming an accidental music industry titan, a sort of digital-age David Geffen or Ahmet Ertegun. Google, of course, has many challenges ahead of it before executives there wield that kind of influence. Geffen and Ertegun, after all, were two of the most powerful label bosses ever.

No one is saying, of course, that Schmidt will be hanging gold albums on his office wall or moving to Hollywood. For one thing, Google isn't in the business of promoting talent or producing records. For another thing, the company hasn't produced the kind of revenues that would put it on par with the likes of iTunes or even Amazon, according to one music industry source.

Not only that, Google at this point doesn't possess the licensing rights to the music libraries from all four major labels. YouTube and Warner Music Group failed to reach a new licensing agreement and Warner's content has been removed from the site.

But in terms of influence, matching what the old record moguls accomplished isn't that hard to imagine.

Google's a powerful music distributor
Let's start with YouTube. Worldwide visitors to the site now number more than 100 million per month. Of the top 20 all-time most viewed clips at the site, 12 of them are music videos. The most watched YouTube channel belongs to Universal Music Group, the largest of the four top record labels. And YouTube has become one of the most popular ways to share music legally.

Google's appeal as a digital jukebox is first that it's free of charge to users and that many people are so familiar with the site. The site enables fans to embed songs on their blogs or Web sites and provides an easy and legal way to share music. If someone wants to send a song to a friend, they can just e-mail a link to the song's YouTube video.

YouTube is trying to capitalize on the popularity of music videos by posting click-to-buy links near the videos that lead to Amazon or Apple's iTunes. Google declined to provide sales numbers for the ads.

Google's G-1 cell phone could become an even more powerful music platform than YouTube--that is if the phone continues to attract consumers.

Studies show that sales of mobile music will skyrocket in the next two years. Songs purchased via handsets will reach $7.3 billion by 2011, nearly equal to that of digital downloads, according to a report from eMarketer. Together, they are expected to make up 56 percent of total music sales.

More than 1 million G-1 units were sold in 2008, the year it was launched. Apple has raised its mobile music stake by enabling iPhone owners to download music via cellphone networks.

This is all mostly good news for the major labels. They need to find new distribution models as record stores disappear. They need competitors to iTunes, which has become too powerful for some in the music business. They need to have a strong presence in mobile music sales.

Google needs to drive more music revenue
Where things could get sticky for the labels is if they hand too much power to Google. They don't want Schmidt to be able to dictate to them the way that Apple CEO Steve Jobs (registration required) has for the past few years.

For Google, one of the main challenges is executing a new music ad model. Two music industry sources say that Google has done only a lackluster job of selling ads against music videos and other label content. Another hazard is in negotiating with the labels.

For example, Warner Music pulled out of talks with YouTube after Google reps declined to fork over upfront money, my music sources said. All three of the other labels receive advances but Warner doesn't. The reason is Warner agreed to forgo an advance back in 2006 when it signed its original deal and YouTube wants to maintain those terms.

Of course, there's Apple. Anybody selling music, either downloads or the ad-supported kind, must consider Apple their biggest competitor. Apple's iTunes appears on pace to sell 2 billion songs a year.

Perhaps the biggest question is whether anybody wants Google to have a grip on videos, music, news, books, photos... all our media?

AdMob put out a call Tuesday for Android developers, as it unveiled an ad unit specifically for applications running on Google's smartphone.

AdMob's ad unit is designed to allow third-party developers to generate revenue from the applications they create for Google's Android mobile phone. AccuWeather, Jirbo, and TapJoy developers have already put AdMob's Android ad unit to work, the company said.

"We are already seeing strong interest in developing applications for Android-based devices, similar to what we saw with the iPhone last summer," Ali Diab, AdMob vice president of product management, said in a statement.

AdMob, based in San Mateo, Calif., serves mobile banner and text ads. The company works with more than 6,000 mobile sites and 450 iPhone applications.

Steve Horowitz, engineering director of Google's Android project to build a Linux-based open-source phone operating system, has left the company to become chief technology officer of Coupons.com.

"The company is at a pivotal point in its business, and I am eager to help further advance its development and deployment of new platforms and services for digital promotions," Horowitz said in a statement Tuesday.

Coupons.com offers coupons online. Using its technology, people printed coupons worth more than $300 million in 2008, up 140 percent from 2007, the company said, but it's not clear how many people actually used them.

Universal Music exec Rio Caraeff (left), with R&B singer Akon, says Universal is more flexible and willing to experiment with new technologies than ever.

(Credit: Anne Gim)

q&a Rio Caraeff didn't come up in the music business scouring nightclubs and honkey tonks for talented new acts.

Caraeff, executive vice president of Universal Music Group's eLabs, has a background in mobile technology and software. Nonetheless, he just might be the prototype for the label exec of the future.

Unlike more traditional industry suits, Caraeff doesn't believe litigation is the answer to piracy. He doesn't believe in copy-protection software. He doesn't believe that the music industry needs to find a strong competitor to Apple to flourish. What he does believe in nurturing new revenue streams and pruning 10-click online music shopping to one. He believes in the power of mobile devices to sell music (he says Google's cell phone, Android, is proving to be a powerful music-buying tool).

He appears to be right in at least some of his beliefs as Universal, the home of U2, Akon, and the Black Eyed Peas, is coming off a productive year. For the first nine months of 2008, Universal reported that revenue was up 3.5 percent to nearly $4 billion and digital sales grew 33 percent.

Perhaps the best illustration of how Universal and the rest of the music industry is starting to catch on is the disappearance of digital rights management, the software that attempts to block unauthorized music copying. DRM, which failed to do much more than alienate those who bought music legally, was done away with last week at iTunes--the country's largest music retailer. Last month, the lobbying group for the four largest labels said it was moving away from suing individuals for file sharing. Caraeff agreed to speak with CNET recently.

Q: The music industry was accused of trying to kill digital music rather than understand it. Compare the industry's attitude then to now.
Caraeff: I think we've definitely learned a lot over the last few years. We're much more flexible. We're more experimental. We're trying new things constantly. There is nothing we won't try. We're continually revising our business models. And we're reacting to what the marketplace is asking us for both in terms of what customers want as well as what our distributors and artists want. It's clear that fans like to stream music on the Internet. We wanted to figure out how to create a business model to allow audio to be streamed on a free-to-consumer basis online. Before we had an ad supported streaming model for audio we had a subscription-based program for streaming audio and that's basically a small amount of people who are willing to pay for that. But we look at the scale and size of the opportunity so we created a new model to allow audio to be streamed in full-length high quality on demand fashion. We put those deals in place with everybody from Last.fm to iMeem to MySpace and a variety of other sites where you can stream anything you want on demand for free.

The removal of DRM on songs and albums is also a major example of how we've changed, both in terms in enabling existing retailers that works on devices like iPods. We're not saying we're inflexible. We're saying we're going to change, we're going to adapt, we're going to listen to what the market is asking for, we're going to accommodate.

These are some small examples of how we've changed. Our culture across our management, across our labels is very much in tune with creating new business models, diversifying where our revenue comes from, listening to what people want to do with music and coming up with ways to support that instead of suppress that.

Q: What about piracy? Do you guys just let the RIAA handle that? Or do you direct some of the strategy there?
Personally I believe the only long-term solution is a marketplace based solution, you address the needs of the customer to give them what they want when they want it. If we don't there are other services that don't have the same rules who will. Basically pirates have every advantage. They have no licenses they need to take, no rules they need to abide by, no geography with which they have to be concerned about. That's our competition. You have to compete with that in a marketplace based model. Other tactics, such as litigation or other legal remedies is something we always reserve the right to pursue, but I don't believe that's a definitive or long-term fix. I don't think we're ever going to ever eliminate piracy with the most progressive and aggressive digital policies. There's always going to be people who have more time and money and the thrill of circumventing the channel is what its about. It's not about getting the music. Our goal is to give the mass market every opportunity to consume music wherever and whenever they want in a convenient and easy way so it's just not worth it to get involved in a gray or black market.

Q: Tell me about mobile. You come from that sector and you obviously believe in it very much. How have you guys benefited from handhelds?
I joined the company in 2005 with a specific mandate of building a large mobile business for Universal. My background is in wireless and software. So over two years I built a very large mobile business, well in access of $100 million. We built a distribution network. We built relationships with every wireless operator and every device manufacturer. We established channels of distributions so we could put our content through to every one of those partners. We started developing new content so it wasn't just ringtones or re-purposing old content for mobile. We started diversifying away from ringtones. We launched ring-back tones, we launched voice and video tones. We launched full-length music sold over the air to the mobile handset. We launched mobile video services that were both paid and free to consumer under ad models.

We also merged our mobile group with our online group recognizing that the world is changing. The customer doesn't want a mobile only experience. They want an all digital multi-platform experience. They want to consume music on their mobile handset but have parity on their PC and other online platforms. Partners like Verizon and AT&T wanted to have multi-platform online experiences as well. It didn't make sense to have a silo approach. Now at Universal, we don't have a mobile business. We don't have an online business. We just have one multi-platform digital business. We equalized our pricing so it costs the same amount of money to buy a song on a cell phone as it does on a PC. These are things that make sense on a consumer perspective.

Other things we included were helping Amazon to launch its music store. We worked with Amazon to get their store integrated into the Android platform and now Amazon will tell you that Android is their single largest source of downloads from any third-party partnership that they've ever done. It's a tremendous amount of consumption that we're seeing once you integrate it seamlessly into a user experience that's elegant and easy to use. It's not 10 clicks. It's very elegant and easy. We're starting to see consumption increase significantly.

It's early days on Android. There's not that many out there on T-Mobile, but even with the small amount out there, they're downloading and purchasing a ton of music over the air on T-Mobile. It's not the first example of where we've integrated a music store into a cell phone but the example is once the device becomes more full featured with the user experience it becomes easier to use. Once the platform evolves, you'll see music consumption really start to skyrocket.

Q: How big is mobile within your digital business?
About 40 (percent) to 45 percent of our overall digital business is coming from mobile channels like Verizon and AT&T.

Q: So this is the new distribution method?
I think you're right, but the future for us is about dozens of unique revenue streams and dozens of different products. It's not about just selling a CD anymore. We have subscription based annuity models, we have download models, free to consumer ad models. On much of our new front line Pop or R&B or Urban release--everything from Fergie to Rihanna to Pusscat Dolls--were seeing mobile comprising 20 (percent) to 45 percent of the revenue for those artists, which is a tremendous amount.

Q: Let's talk about MySpace and Amazon. Does the fact that they don't have a device hold them back from competing with Apple?
I don't' think not having a device is holding them back per se but I think that there is something to be said for an elegant and integrated solution, a complete thought so to speak that Apple has breathed into the market. The entire ecosystem of a proprietary player and a dedicated store and a seamless integration has been a very powerful thing for our industry and for Apple. On the other hand, I think many people already have devices. They have iPods, they have mobile phones that play music. It's really about getting the Amazon store to work seamlessly with the devices and software you already have or getting MySpace services to work well with the services you already have. I don't think having more devices and more proprietary software or hardware in the market is the right answer. Microsoft has been trying to do that now for a few years with their Zune ecosystem. It is elegant, it does work well, but lots of proprietary silos I don't think scales well either. So I think what's missing is the evolution of the middleware, the evolution of the user experience, turning 10 clicks into one click, more elegant software and more elegant web services, which I think need to evolve a generation or two.

Q: Talk to me about YouTube as a music hub
If you look at where the bright spots are in the music industry, certainly in the last year the rise of free-to-consumer ad-supported video has become a very significant part of our business coming from a variety of areas. YouTube is driving a very large quantity of that, but about 70 percent of that growth is coming from outside of the U.S. YouTube is a large driver of that outside of the U.S. as well. It's really coming to fruition I think in part due to YouTube's recent focus on monetization and really trying to drive revenue around premium content more so than they have in the history of their short existence. They have finally turned the spotlight on 'How do we turn this into a business' and that's benefiting the entire ecosystem of content owners as well.

YouTube is in many countries. It's a dominate source with which customers and music fans go to find out about new music and to sample music and consume music to discover content, to participate in a community around video and so it's become more than a store and its not like radio or TV, but it's become essentially a very powerful place with which our record companies work with our artists to drive awareness and drive links back to their site and drive general marketing and promotion and distribution of our artists. At the same time it's inherently revenue generating.

It's not like radio, where it's just promotional. It's a revenue stream, a commercial business. It's growing tremendously. It's up almost 80 percent for us year-over-year in the U.S. in terms of our revenue from this category. We have a great relationship with YouTube, and the future for us will be more than with YouTube than we're doing today. We're working with them on a variety of new concepts and new businesses to take the groundwork we've done in the last year and half and do a lot more with it. I wouldn't expect to see us just do business with YouTube like we used to do. You'll see us get closer to YouTube to do things we've never done before and try and increase the amount of revenue and the reach for our videos and new programming we want to create around our artists.

Q: So you are seeing some good revenue from this YouTube deal?
Yes. It's early days but it's definitely tens of millions of dollars at this point.

Q: What about the shift away from DRM?
We recognize the sale of downloaded music only meets the needs of certain customers. We would love it of course if everybody downloaded music but we recognize that's not the way the world works. A big part of my job and a big part of our strategy is figuring out how to derive revenue from everybody who consumes music when only a small subset of people who choose to buy it. A lot of that ties back into a long-term strategy shift about how do we shift from a revenue per unit model to a revenue per user model where the metrics for success and the metrics for how we define and grow our business are driven by what type of revenue we're getting from every user who accesses the network, every user who has a music-capable handset.

Even though only a small percentage may actually choose to download and buy music, a large percentage will actually consume music. We're asking how do we build new business models that will allow us to get paid by hundreds of millions of people whether they buy music or don't buy music versus getting paid by those who choose to pay. It's really about do we want a large piece of a small pie or a smaller piece of a much larger pie. That's really about looking out five years ahead in terms of how we transform UMG from the company we used to be to the company we need to be.

Q: That sounds like a big challenge.
That's how everybody at our company is approaching the business. It's certainly what gets me excited about coming to work in the morning. The change and disruption in the music industry and many other industries as well is personally satisfying and drives a tremendous amount of excitement. I'm part of something that's larger than myself. It's the opportunity to change and transform. It doesn't happen quickly enough. Conversations with partners like Google, Apple, or Comcast, or Nokia are slow take time to come to fruition. We're certainly not about how do we get everybody to buy CDs again. We're very much focused on how do we segment the market so that we can derive revenue from everybody and not just the people willing to pay.