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By David Ibison

The $60m that Nokia is planning to spend on the acquisition of Loudeye, a US online music distributor, is small change for a company that reported operating profits of €4.6bn ($5.8bn) last year. The ramifications of the deal, however, are big.

The Finnish company is planning to use Loudeye’s library of 1.6m music tracks as a platform upon which to build its own separately branded online music store, to be launched in 2007.

It is a deal that means Nokia, Apple and Microsoft – three of the biggest names in computing and communications – are now all competing in the fast-growing market for digital music.

Apple is the market leader with its iPod player and iTunes, its online music store, launched in 2001. But Microsoft is planning to unveil its own version of the iPod and iTunes later this year, called ‘Zune’.

Nokia, however, believes the trend towards convergence means consumers will listen to music on their phones and not the standalone players offered by Apple and Microsoft.

Its proposed new, as yet unnamed, service will allow owners of Nokia mobile phones to purchase music via their phone from its new site, listen to it on their phone and pay for it on their phone bill.

“There is now a clear battle between music-enabled mobiles and standalone players,” said one prominent industry analyst, who asked not to be named.

Nokia’s faith in the future of music-enabled phones is based on growing evidence that the market for so-called mobile music – that is music purchased via phones and listened to on phones – is on the cusp of major change.

Juniper Research, a telecoms analysis company, points out the industry has so far been dominated by the download of ring tones, but this will change with “the evolution of the mobile handset into a multi-purpose communications and entertainment device”.

It believes in the next five years, the mobile music market will shift to full-track downloads – entire songs downloaded to handsets over cellular networks – rather than transferred to phones from PCs.

“Full-track music has been the central offering of many third-generation service launches around the world and as 3G usage gathers pace, the mobile music market is preparing to enter a new growth phase,” said Bruce Gibson, research director at Juniper. He has forecast the mobile music business will generate revenues of $14bn worldwide by 2011 and that full-track mobile downloads will make up 32 per cent of this.

Apple is clearly aware of these trends. It has already joined forces with Motorola, the US mobile phone company, which allows iTunes songs to be played on Motorola’s phones.

There are also strong rumours Apple is considering launching an iPod phone.

At a conference call with analysts on July 19, Peter Oppenheimer, Apple’s chief financial officer, said: “We don’t think that the phones available today make the best music players. We think the iPod is. But over time, that is likely to change. And we’re not sitting around doing nothing.”

One analyst on the call said: “He basically confirmed it.”

One question mark over Nokia’s move might be the impact it has on its relationship with wireless operators, such as Verizon and Sprint Nextel, who offer their own online music stores that allow users to download songs on to phones.

Analysts cautioned that it is possible these operators might stop offering their customers Nokia mobile phones if they think they will switch to the Finnish firm’s online music store instead of theirs.

But there is a geographical dimension to Nokia’s belief in the music-enabled phone that might outweigh these concerns. According to Juniper’s research, around 40 per cent of the market for mobile music is expected to come from Asia.

Nokia’s latest quarterly results revealed second quarter net profit increased 43 per cent to €1.14bn ($1.45bn) driven by sales in Asian markets. Sales to China increased 58 per cent year-on-year to 11.7m units, while other Asia-Pacific sales rose 79 per cent to 18.8m.

As these markets mature and adopt third-generation capability, users will want to upgrade to phones that can download and play music, Nokia believes.

“Nokia’s move into iTunes space is not about making money from the online music store. It is about selling more devices,” said the analyst. “You use the software to sell the hardware.”

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