From Apple to Orange: How MNOs Can Make Mobile Music Work in an iTunes World

• The public perception of the cost for legal downloadable music has been defined by Apple’s one-size-fits-all pricing of $0.99 per track. This $0.99 threshold presents a significant barrier to entry for service providers looking to develop profitable mobile music business models.
• Despite the initial success of OTA models, we believe the degree of price differentiation between OTA and PC-based downloads will narrow considerably over the next two years. Operators will need to concede that iTunes remains the epicenter of all digital music pricing and therefore sets the bar for the price of all legal digital music, regardless of delivery mechanism.
• The key to escaping iTunes gravitational pull may lie in the bundling of services, content, and music. We believe the most significant shift in the mobile music market will come in the form of subscriptions.

• Apple expects the iPhone to account for 1% of all handset sales globally by the end of 2008 (10 million units). We believe that this will be an uphill battle for a number of reasons: price, trying to be everything to everyone, copycats, and the fact that there is little in the iPhone for MNOs.

• The risk of MNO disintermediation is real, but MNO may be too strong to be kept out of the value chain: the likely evolution of mobile music is for a device that allows the user to access a virtually infinite library of content which can be customized at any time. The sheer scale of the mobile music opportunity in terms of enabled handsets means that operators will be very strongly positioned as the gatekeepers of access to subscribers.

• Apple’s Steve Jobs want Digital Rights Management (DRM), to be removed. That makes sense for Apple, but we don’t see it. We believe that DRM will continue to have a significant role in mobile music, but it should be less about restriction and more about enabling new forms of distribution and experimentation for subscribers.

• The potential for mobile music is more attractive with subscription-based models: we estimate that the global market for “a la carte” mobile music would be worth around $US2.5bn to MNOs in 2011; with subscription models, mobile music market potential swells over US$4Bn in 2011 (not including ringtones, etc.).

Acronyms and Abbreviations

Executive Summary

Introduction

Section 1: Making Mobile Music Models Work

The iTunes Challenge: a US$0.99 threshold

Over-the-Air models are working—for now

Avoiding “Apple to Apple” Comparisons

It’s all about bundling music

But what about network capacity?

Selling record companies to optimal mobile music models

Section 2: The iPhone Effect: Short Term, We Don’t See It

The iPhone’s Logic and 1+1=1

The iPhone, and the challenge of being everything to everyone

Not much in it for MNOs

iPhone copycats on the prowl

Section 3: Of the Potential for MNO Disintermediation

Does the mobile music value chain need MNOs?

How MNOs will challenge disintermediation

Section 4: Can Mobile Music Be DRM-free?

Behind the Jobs vision of DRM

DRM is here to stay

Section 5: Charting the Future of Mobile Music

Section 6: Mobile Music Forecast—Scenario Analysis

Section 7: Mobile Music Case Studies: Telus, KDDI, Amp’d, and Nokia

CASE STUDY: Telus Embraces Subscription Services

CASE STUDY: KDDI’s EZ Chaka-Uta-Full—From Walled Garden to Open Shop

CASE STUDY: Amp’d Mobile—Matching iTunes Dollar for Dollar

CASE STUDY: Nokia Goes After Apple, Increases Mobile Carrier Disintermediation Threat