Do GSM Operators Threaten Mobile Music?

Opinion: Costly patents are preventing the music download business from happening, says the GSM Association. Are they kidding?

One has to ask whether the music business would know the butter side of a slice of toast from the crumb side.

Watch the current dispute—a fierce one—that is just breaking out. The massed ranks of the GSM (Global System for Mobile Communications) operators are lined up against the massed ranks of anti-copying software-patent holders. The GSM Association has issued a one-week ultimatum: "Do us a better deal." And the threat? "Otherwise, well all suffer!"

And we all will.

The argument is simple: Software patents, held mostly by MPEG LA on behalf of a consortium, are too expensive. Using these patents is preventing the music-download business from happening, says the GSMA (GSM Association).

Are they kidding?

On the face of it, it has to be absurd greed. The software theyre complaining about is their own; it was developed by the OMA (Open Mobile Alliance) so that it could be built into every phone in the world. And downloads of music arent cheap: Just last night, Orange announced a music-download service called Find Music—which will ask £1.50 per track, the better part of $3 U.S.—in a world where Apples iTunes store asks just 99 cents per track.

But the threat isnt a trivial one: All GSM operators are staring at red ink at the bottom of their accounts for downloads. Thats all downloads, and all operators; even the least unprofitable download businesses (probably Vodafone) are losing money on everything they "sell" to phone users.

And the software people are not asking for peanuts. The royalty burden works out at about a dollar per phone. "If handset makers had put anti-piracy protection software in all 684 million mobile phones sold last year, the $684 million in royalties would have exceeded total digital music sales on the Web for the year," commented a Reuters analysis.

The problem is that this dollar-per-phone payment does nothing for the phone operators. It is purely a DRM (digital rights management) tax, on an industry that really cant afford to spend money on downloads that will make the music publishers rich, but just add to the bottom (red) line for the phone business.

Insiders say small operators lose a dollar or more per download; Vodafone and other giants, with bigger margins, are losing a tenth of that.

Why do they do it?

Simple: Anybody who doesnt will lose customers to the networks that do. It all has to do with reducing "churn" and retaining subscribers.

/zimages/6/28571.gifClick here to read about the mobile market awaiting a break in the DRM logjam.

The latest card to play to leapfrog rivals is music. The 3G (third generation) pioneer, Hutchison, has been making a big play out of music-video downloads—unlike rivals, it has only WCDMA (Wireless Code Division Multiple Access) phones with faster data speeds, and less congested networks. So, the others have to respond.

T-Mobile has triggered a product-design scrummage by asking all phone makers to produce GSM-based MP3-player phones that will rival the Apple iPod, while Sony Ericsson has moved the "Walkman" brand into its phone business. At the recent 3GSM show, there were more than a dozen Chinese look-alike designs aimed at the T-Mobile spec, and Microsoft has joined in the charge with its own HTC-build design.

Music distributors are rubbing their hands til the knuckles crack at the prospect of huge royalties. But unless the operators can find a way of making money from the business—and quickly—it really cant be sustained.

The associations announcement says the matter is urgent and must be resolved immediately: "GSMA is soliciting proposals from all digital-rights-management solution providers by April 11," it says. Proposals will be evaluated and short-listed for presentation to the board, from which recommendations will be made to the GSMA membership.

A sensible compromise, of course, would put "jam tomorrow" against the cost of jam today. But were in the hands of lawyers here, and rights holders, while they themselves are in the grip of billing systems.

Its a safe bet that this issue will be a hot topic at this weeks Billing Systems conference, where mobile operators try to cut costs and streamline operations. But that wont impress rights holders—neither music rights holders nor software IP (intellectual property) holders. They will look at the money made by networks, and they will want their share.

And so, the result will be that the OMA package of software patents will be abandoned. Each mobile operator will go for a unique system, and each phone manufacturer will try to get around the copying problem. The download business, which has the potential to be really, really big, will be stifled at birth, and over a span of five years, the subject will be limited to legal disputes.

Meanwhile, music exchange over BitTorrent peer-to-peer networks will continue unabated, generating exposure to music that the buying public otherwise would not hear—and boosting sales. And the music industry will lament and tear its hypocritical clothing, and give free air time to radio stations, while claiming that it is "losing millions" to rip-offs when what it really is getting is free advertising.

Doesnt anybody in this business understand the value of being a medium-sized fish in a huge lake, rather than being the largest minnow in a muddy puddle?

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