Preparing for the iPhone onslaught

With the iPhone launch fast approaching, AT&T's competitors are bracing their own music services for what will be an onslaught of hype surrounding the new Apple gadget, the launch of which should not only compete heavily with their services but also draw enormous attention to the mobile music space.

Verizon Wireless and Sprint both have downloadable music services run by WiderThan and Groove Mobile, respectively, and both carriers have chosen to run their own branded music portals, pitting their own names and customer relationships against Apple's iTunes and iPod might. Their advantage is the ability to sell their music through over-the-air download directly to the phone, while Cingular and Apple will sell the music capabilities of the iPhone just like any other iPod: over a USB link to the PC.

But that over-the-air feature may not be as big an advantage as Sprint and Verizon Wireless might like. The majority of people using music phones are sideloading music from their PCs onto their phones from their PCs just as they would with an iPod. M:Metrics found in data collected earlier this year that twice as many people in the U.S. were sideloading music from their PCs than downloading music from their carriers' stores, and in markets where mobile music has penetrated further, the number is even higher. In January in the U.K., there were three times as many sideloaders as wireless downloaders, and in Germany the ratio was 7-to-1.

“The fact is that the majority of music that is downloaded to a device is sideloaded,” a spokesman for AT&T said. “We want to be in synch with what customers are doing.”

Verizon Wireless recently reported that 95% of the people downloading music from its V CAST Music portal are doing it over the air, paying $1 more to get the song immediately on their phone rather than paying less to download it over the Internet to a PC and sideload it on the phone. That number, however, most likely means that Verizon Wireless has established itself as an over-the-air download provider but has not built a competitive position for itself as an overall music portal, i.e., customers go to the V CAST portal when they want a song immediately and are away from their PCs, but when they're at home, they are going to other music portals or just ripping songs from their CDs.

That business model, however, is likely just fine by Verizon Wireless and the other carriers who are in the business of selling wireless services, not Internet services. In fact, Apple runs a similar business model. Though it runs the enormously popular iTunes online store, the majority of music that makes it onto iPods is ripped from customers' own personal CD collections. Apple may not collect revenue on those ripped files, but its primary business goal is to sell iPods, not individual song tracks. The carriers, meanwhile, aren't trying to sell individual song tracks. They're trying to sell data subscriptions and promote the benefits of wireless data services to their customers. That explains why Sprint recently lowered its price for an over-the-air song download to $1 with a data subscription, a price matching the negligible-margin rates of iTunes.

“I can't comment on our margins or the business model, but our view is really the macro view of wireless data,” said Alana Muller, director of wireless data programming and marketing for Sprint. “Sprint's goal is to be great provider of wireless data services overall. It's a much wider view than selling individual song downloads.”

Sideloading may be king today, but that may be because that's the transfer format that the vast majority of customers are accustomed to. To put it in perspective, Apple has sold 100 million iPods worldwide, all of which use the standard USB-to-PC hookup. While millions of music-playing phones have been sold, only a fraction of them can actually support over-the-air music transfer. Overall, the number of people using their phones for music is still small, and there's no telling what direction mobile music will go in.

Verizon Wireless points to its V Cast traffic numbers as an encouraging sign. If 95% of its music portal customers are choosing to pay more to download music over the air when the same track is available for half the price from a PC, then there is definitive value to the wireless download, said Ed Ruth, associate director of music content for Verizon Wireless.

“We're absolutely seeing explosive growth in our mobile music store,” Ruth said. “People don't want to go home. They want the immediacy of an over-the-air download, and we're providing it to them.”

Ironically the iPhone may create the demand for wireless song downloads, even though it doesn't support that capability. In-Stat released a survey last week that found that one-third of U.S. mobile subscribers now own a phone capable of playing music and other multimedia, but less than 20% of that group uses them regularly to play music. People aren't yet accustomed to the idea of the phone as a music device, but they are most definitely accustomed to the iPod. So Apple's launch of iPhone could bring the public around to the mobile music concept.

Even AT&T, which is the iPhone's sole distributor in the U.S., is counting on the iPhone as being a catalyst for an even larger mobile music market. After announcing its partnership with Apple in January, AT&T has been rolling out other music services such as the Napster and Yahoo! Music subscription services and the eMusic download service.

“The iPhone is a part of our music strategy — a very important part — but a part nonetheless,” AT&T's spokesman said.