Ovum: Nokia acquires Loudeye: what tune is it playing?

Michele Mackenzie at Ovum adds her thoughts on Nokia's (NOK) acquisition of "white-label digital music service provider Loudeye for $60 million. The deal is not expected to complete until Q4 2006." She writes:

With the acquisition of Loudeye, Nokia has acquired a strong, well-established company in the broadband digital music space. Loudeye is already a dominant player in this industry and has been successful to date in building a business based on scale and volume, which is critical in a low margin, nascent digital music industry.

Mackenzie also notes that Loudeye also provides Nokia with:

• long-established music rights deals with major record labels and independent labels, in some cases for both online and mobile channels - Loudeye has a strong reputation already with the labels
• a proven white-label service and platform, and technological know-how in online digital music - the company fulfils many roles in the value chain, providing hosting, aggregation, DRM, payment facilities and dual delivery, as well as customer service and marketing if required
• an existing customer base in the online market, consisting of telecommunications providers and consumer brands.

On whether Nokia can match Apple's (AAPL) vertically integrated, direct-to-consumer business model without alienating Nokia's biggest customer segment , she states:

In the past, Nokia has been criticised by wireless operators for providing content direct to the consumer through its own portal. With such a strong consumer brand, wireless operators viewed Nokia as a threat to their own portal businesses, in which they were investing heavily. And as the (initial) buyers of most of Nokia's phones, they naturally resented what they saw as Nokia competing with its own customers. However, a couple of years ago Nokia reviewed its strategy and took a much less conflicting approach to content. It phased out its own content portal and launched Preminet, a WASP-type service portfolio, which repositioned it as a B2B provider in the value chain.

She believcs "the Loudeye acquisition could stir up trouble again, this time in a content area in which operators are especially sensitive: music. It was notable that there was no mention in the announcement of the wireless operator or a B2B offering. Wireless operators that are currently investing heavily in launching wireless music download and streaming services will be understandably concerned if this is not clarified." Mackenzie concludes with:

In order to launch a D2C music service over the air, Nokia would have to strike deals with the operators for wholesale data traffic. At the moment, many third-party service providers of rich media are prevented from entering the market for lack of such deals, because consumers will not pay heavy data traffic charges on top of the content fee to download over the air. Nokia could provide a sideloading service, but this really would be counter-cultural for a company whose business hinges on wireless-connected devices.

We believe that this would be a dangerous strategy for Nokia to take and would only serve to alienate its main customer base.