Nokia eyes China boost for struggling music service

A visitor looks at Nokia mobile phones on display at the '9th China Beijing International High-Tech Expo' in Beijing May 26, 2006.

BEIJING/HELSINKI (Reuters) - Nokia will offer free music with its mobile phones in China, as it looks to emerging markets to boost the download service that is struggling to compete with Apple Inc's popular iTunes.

The world's top cellphone maker will offer free music downloads from major labels and a number of independents at the Chinese launch for its Comes with Music service, which is tailored for downloads to cellphones and PCs.

Nokia is hoping the downloads will lift sales of its phones in China and support phone prices. But it likely has to pay something to the labels to distribute music, raising its risks.

With more than 700 million subscribers, China is the world's biggest mobile market by users. But rampant piracy in the country has kept most major music labels and movie makers from realizing significant revenue there despite its huge potential.

"Music is free in China -- Nokia's offer is like legalizing cannabis in Holland," said John Strand, chief executive of Strand Consult.

Shares in Nokia were down 2 percent at 11.47 euros at 0942 GMT, underperforming a 1.4 percent drop in technology stocks.

"This move echoes the decision to make navigation free and signals Nokia's new strategy of giving services away rather than seeking explicit revenues," said Martin Garner, an analyst at CCS Insight.

"Success will depend on indirect revenue such as advertising and cross-selling, otherwise margins will suffer," he said.

Nokia unveiled the service in late 2008 in Britain -- seen as a test market for new mobile services in Europe -- but it has lacked operator support and has gained little traction in developed markets since then.

Reasons behind the lackluster performance include use of older supporting handsets for the product at its launch, software that some considered user unfriendly and a difficult to understand product offering.

Earlier this year Niklas Savander, the head of Nokia services, told Reuters the offering would focus increasingly on the emerging markets.

"The forthcoming launch of the service in India will add significant scale and differentiation in another critical market," Nokia said.

Labels signed on to the deal include Vivendi's Universal Music, EMI, Warner Music Group and the music arm of Sony.

EIGHT MODELS

The new service will initially be offered over eight Nokia models, with entry prices starting from 140 euros ($187), and Nokia said there will be no extra fee for music on top of the phone price like on other markets.

In developed markets it has sold the same models with and without music -- with the music downloading service price seen at 50-100 euros.

Nokia announced that the China service will break with its previous versions of its Comes with Music services by not including DRM software, which limits sharing of songs between different devices.

That will allow consumers to freely share music between any device, unlike other markets where the service limits usage to just one phone and one computer.

"It's unique for China where piracy has had a stronghold," said Nokia spokesman Doug Dawson.

($1=.7498 Euro)

(Editing by Lincoln Feast and Erica Billingham)