Nokia’s Loudeye Acquisition Points to New Mobile Business Models

Fresh on the heels of the announcement that Telestream had acquired Popwire, Loudeye announced that it has agreed to be acquired by Nokia. As we noted in May, Loudeye had sold off its U.S. music service to Muze, which provided Muze with what it claims is the world’s largest label-sanctioned catalog, augmented by the deepest, most comprehensive, and most accurate music database available.

This left Loudeye with its white-label music service business, which included approximately 75 private-label music stores, primarily in Europe, South Africa, and Australia. Under the OD2 heading, these services at the time had accounted for $6.4 million in revenues for the reported quarter, accounting for more than 75% of the company’s total revenues.

What Nokia gains from the deal, then, is a series of high-profile music stores that already have the ability to download to personal music devices as well as cell phones. But that’s just the beginning. It allows Nokia to own the encoding, distribution, and playback devices, in a way that no other company–except Apple excepted–has been able to muster.

Some pundits are decrying the move as a cheap way for Nokia to gain market exposure as an innovative company. According to Jeremy Silver, who describes himself on his blog as a former employee of encoding.com, Loudeye’s former moniker, the Loudeye purchase is strictly about OD2.

"The extraordinary thing about this purchase is that it appears to be made up of the OD2 business only, since there is really precious little else left of Loudeye," says Silver. "The OD2 music distribution system has for a long time supplied in white label form the service for a number of European retailers - Tiscali, HMV, and others . . . It has forever and a day been in need of a serious redesign, but the exigencies of business and underinvestment never seem to have allowed that to happen."

The Loudeye acquisition could also be considered counter-intuitive and potentially threatening to Nokia’s core customer base as a mobile phone service provider. Indeed, these service providers routinely ask Nokia and other handset providers to eliminate features (such as WiFi) that might allow customers to gather content "off network" without involving the mobile service provider’s data bandwidth, which is a significant and growing portion of these providers’ revenues.

But Nokia now has an end-to-end solution that it can provide to these same mobile phone service providers. By providing encoding, virtual music storefronts, and the ability to play this content on "enhanced" Nokia handsets, some of which may involve specific and proprietary digital rights management, Nokia frees the mobile handset provider from the potential cycle that siphoned a significant amount of revenue from their landline counterparts in the late 1990s dot-com craze.

At that time, MCI/WorldCom, AT&T, Cable and Wireless, Sprint, and many of the other traditional landline providers vacillated between thinking they were software houses, building services to sell to customers who would in turn use the provider’s bandwidth, and acting like traditional phone and bandwidth providers. This software house approach, often pitched to potential customers as custom-coded solutions sold at off-the-shelf prices, was based on poor ROI models that required a lengthy "captive audience" contract to even approach breakeven.

Mobile phone providers have begun to move down this same slippery slope, but innovative companies like Nokia that have pre-existing relationships with the mobile service providers (and a few key startups) actually give the service providers a way to sell bandwidth and provide differentiation from other service providers, allowing the service providers to turn their focus from software creation back to their core competency of selling bandwidth and minutes.

For its part, Nokia only paid approximately two times annual revenues, or $60 million, for Loudeye. Even with the announcement that several companies, such as Coca-Cola, are abandoning online music stores for newer marketing schemes, Nokia can easily recoup its cost with a contract from one key service provider.

Other encoding and music distribution companies may be following suit. According to a recent AP article, Napster has been courting top-tier service providers. It’s signed up SunCom, which was an AT&T Wireless marketing partner in the Southeast U.S. and now has its own network, and has also announced an agreement with Japanese wireless carrier NTT DoCoMo Inc.

"We do not have our heads in the sand regarding a possible merger or acquisition," said Napster CEO and chairman Chris Gorog, Napster's chairman and chief executive. "We continue to receive a lot of interest in the company and would like to assure our investors that we will always carefully weigh any value creation alternatives against the opportunity and risk associated with continuing as a stand-alone company."

Does this mean immediate competition for Apple? Probably not, as it will take at least three quarters for Nokia to complete the Loudeye acquisition and consolidate the encoding and distribution services. And it is expected to take another two quarters to produce handsets that would handle a Nokia-specific distribution model. But in the move to unseat the current market leader, who has about 80% of the digital music download market, 15 months is not such a long time if the mobile service providers cooperate.