Nokia puts brave face on 'Comes Without Profits'

Nokia has defended its "Comes With Music" giveway and insists it will make money from the promotion. Somehow.

"We expect to make money both from our traditional device sales, as well as from the 'Comes With Music' service," music boss Liz Schimel told Reuters. "I can assure you that we are looking out for everyone's interests in creating these new business models, including our own."

As we revealed earlier this week, Nokia's rush to announce Comes With Music leaves it with steep liabilities.

Owners of a CwM phone can download as much music as they want from the catalogues of Universal Music and Sony BMG, and keep it after a year. (Nokia hopes to sign everyone in time for launch). But the company failed to look at consumption patterns, and factor a sensible ceiling into the model. As it is, the more people download the more it costs Nokia.

"Recent articles that I've seen have fundamentally misunderstood the concept behind the Comes With Music model," the former Comcast and AT&T executive says.

Perhaps some have, but the executives still have some explaining to do - as shareholders can do the maths themselves.

The per-handset royalty to UMG is lower than others have reported, at about €10. But each download racks up a cost of about 70p (or 70c in the US). Nokia's profit margin is about 23 per cent, and the average selling price of a handset in Q1 was $125, down from $142 a year ago. Even if Nokia limits CwM to high end (ie, $200) phones, it must hope the user doesn't download very many songs at all.

Perhaps there's a revenue stream that we haven't accounted for - from the operators. But if it exists, it hasn't been disclosed.

It would be far more honest to say that in an attempt to catch-up with Apple, Nokia is spending heavily on subsidising the music business, and risks destroying its own margins on certain models for a short period. And that this will be a price worth paying in the long haul.

As it is, Schimel's claim doesn't stand up to scrutiny. ®