UPDATE 1-Nokia confident free music downloads will profit

"Comes With Music has the potential to equal -- and even exceed -- the current value of the business," Tero Ojanpera, head of entertainment and communities business at Nokia, told a news conference last week when unveiling Sony BMG deal.

"If we sell a single percentage of our total sales as Comes With Music bundles, the revenue for the music industry would be almost the same," Ojanpera said.

Total sales of Nokia's top music phones, the 5310 and the 5610, were more than 4 million during the January-March quarter. Unsubsidised retail prices for the phones were 215 euros ($334) and 280 euros.

With its iconic touch-screen model, Apple's iPhone shocked the handset industry last year, but at prices starting from 400 euros it has not captured a mass following in Europe.

Now, Nokia has stolen the spotlight from Apple in the digital music world, analysts said.

Record labels are looking to Nokia and others to challenge the dominance of Apple's iTunes as they have struggled to negotiate with the American group on a level footing when it comes to issues such as pricing.

"Comes with Music is one of the most exiting things out there in the digital music," said Jupiter's Mulligan.

"Apple is facing market perception of iTunes looking like yesterday's service. Basically, iTunes looks pretty much the same it looked 4 or 5 years ago," he said. (Reporting by Tarmo Virki; Editing by Louise Ireland and David Cowell))