Alliance follows the music

The drive to produce music-playing mobile handsets has prompted an alliance between rivals Microsoft and Nokia, writes Nicholas George

It may not be the bridal march, but last Monday, music seemed to herald a closer relationship between Nokia, the world's number one supplier of mobile phones, and Microsoft, the software giant.

In Cannes, at the 3GSM World Congress, these rival technology groups agreed to work together to allow digital music to be easily transferred between personal computers and phones, both hoping to profit from the potential boom in handsets that play music.

Nokia was not alone in following the music in Cannes. Sony Ericsson, the world's sixth-largest mobile maker, also announced that it would start marketing handsets under Sony's Walkman brand.

So why is music suddenly top of the mobile agenda?

After all, Nokia launched its first music phone, the 3300, in 2002 and in many mid-range phones a music player is now standard. Yet Peter Löfström, a salesman in the Phone House store in Stockholm, says few customers ever ask about the feature.

"Many don't know it is there," he says.

The push partly reflects the need for the phone manufactures to find new features to excite users to upgrade their handsets. Camera phones, the last major innovation, have been on the market for more than four years.

As Ben Wood, a researcher at Gartner explains: "It is becoming increasingly difficult to differentiate yourself with a camera; it is seen as a necessary commodity".

The rush to develop music-playing handsets is a reflection of events outside the industry, most notably the success of Apple's iPod, which has defined the market for the portable digital music player.

Phone manufacturers see themselves taking a chunk of this market.

The ever-shrinking cost of memory capacity means it is now economical to store a more useful music library on a mobile handset.

For example, Sony Ericsson says that for any phone to have the Walkman brand, it must be able to hold at least ten CDs' worth of music.

Nokia's latest moves also highlight the change in the environment around the handset, such as the progress made by Loudeye in establishing a music catalogue and a platform that enables telecoms operators to deliver music wirelessly.

Then there is its alliance with Microsoft, which will enable users to download on their PCs and then transfer to a Nokia phone - but not everyone is convinced about the scale of the music boom.

The iPod has sold about 10 million units since its launch in 2001, compared to handset sales of more than about 650 million last year. Moreover, it is questionable how much the telecom operators will be able to earn from music downloads. As Mr Wood points out, the deal with Microsoft underlines just how PC-centric the digital music model has become.

Perhaps rather than trying to use music to create new revenue streams, the operators will see the devices as a way of attracting younger users to their networks.

But does the tie-in with Microsoft mean Nokia has abandoned its resistance to using the US group's software on its handsets?

And if so, does it run a greater risk of seeing the mobile handset business turn into a mirror image of the PC business?

The sight of a Microsoft executive on the Nokia stage was a shock to many in Cannes this week.

"You just couldn't have imagined this happening a year ago," one watcher remarked.

The link with the software giant extends into the corporate software business, to make it easier for Nokia handsets to receive and send email and synchronise with PCs.

Last year's slip-ups, when Nokia missed trends such as the popularity of the clamshell handset design and mid-market camera phones, may have made it re-evaluate key ideas. Analysts suggest the increasing number of Nokia executives with experience outside the Finnish group has also made it more open to collaboration.

However, on Monday, Nokia was still keen to stress that the co-operation did not extend to handset operating systems and that it is a question of compatibility between specific software programmes.

For example, Windows Media Player will not be installed on the Nokia handsets, but Nokia's software will be able to read Windows Media Audio files.

If anything, some analysts suggested the move could even weaken Microsoft's case to get mobile handset makers using its mobile operating system.

Richard Windsor of Nomura says: "This is a body blow to Windows for Mobile as this announcement will allow Nokia devices to perform as well as Microsoft in corporate email."

Still, the sight of Microsoft and Nokia agreeing to collaborate is a sign of how far both companies have come in their new openness to industry partnerships and how the convergence of mobile communications and computing may change the technology landscape.