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Consumers Don't Have Much Call for Cell Phone Gadgets

Posted on: Wednesday, 2 August 2006, 09:00 CDT

By Eric Benderoff

These days, mobile phones have all sorts of bells and whistles, including models that play videos and download music. Yet so far, customers appear happier using their phones to do old-fashioned things, like making a call.

Heralded as the next big technological conversion, phones that download music and play videos aren't as popular as some in the industry had hoped they would be at this point. And that is forcing some wireless companies to rethink their strategies.

Verizon Wireless, the nation's second-largest carrier, said it will stop charging customers $15 a month to subscribe to a music service few customers were using.

That shift came this week even as Verizon introduced a new music phone, dubbed Chocolate, that is eerily similar in style to the popular iPod, the runaway leader in music-playing gadgets.

Downloading rates for music are less than what industry experts had hoped.

A study released Monday from Forrester Research shows only 6 percent of mobile phone subscribers download or stream music files once a week while only 3 percent of customers do the same with video services. That compares to 38 percent of customers who say they send a text or picture message.

Some of the problems for carriers lie in the popularity of other devices.

Music remains the domain for Apple Computer Inc., even as competitors ranging from mobile phone-makers to Microsoft Corp. revamp their strategies for selling music online.

Now Verizon is "acknowledging that the monthly fee is a barrier to experimentation," holding back the adoption of music services on mobile phones, said Charles Golvin, an analyst with Forrester. "Phones continue to be communication devices."

Verizon will still charge customers $15 a month to access its video services, but customers interested in music will only pay to download the songs.

"It is hard to say goodbye to $15 a month per customer, but by eliminating the fee, a lot of people will start" downloading music, said Jeffrey Nelson, Verizon's executive director of corporate communications. "Two bucks might entice people to start doing this more than $15 plus two bucks."

Verizon charges $1.99 to have a song downloaded directly to a phone with another copy sent to the computer. Or, users can pay 99 cents to download a song to a computer and then manually transfer it to a phone.

Nelson said more downloads have come "over the air" to a consumer's phone, even though it costs $1 more. "That surprises us," he said.

It doesn't surprise Julie Ask, an analyst with Jupiter Research. "The price disparity reflects that people are experimenting," she said. They want to see how the service works.

"The reality is that most of the music I want to put on my phone is what I already own," Ask said. "A small portion of that music is bought from a carrier."

That also applies to the iPod. In a survey Jupiter conducted earlier this year, it found that only 8 percent of the music people have on their iPods comes from Apple's iTunes online music store.

Those figures come despite the fact that Apple has sold more than 1 billion songs from its iTunes music store, launched in 2003.

By comparison, Nelson said Verizon has sold more than 1 million songs online since launching its music service in January, but he did not provide further details.

Nor did Verizon provide details about song downloads or customer usage in Tuesday's second-quarter earnings report. It did report revenue for data services, including text messaging and e-mails, topped $1 billion for the quarter, a record for the carrier.

Music sales are better for Sprint, where more than 4 million songs have been downloaded since October 2005, said spokesman Mark Elliot. He added that Sprint has no plans to separate music downloads from its Power Vision service, which starts at $15 a month and includes video. But of the 51 million subscribers Sprint has, only 750,000 customers were paying for Power Vision at the end of the first quarter.

Cingular Wireless has taken a different path. It does not have a store for people to download songs, but it launched a relationship in October with Motorola Inc. and Apple to put the iTunes software on the Rokr phone. It is now available on one other Cingular phone, but Apple capped the number of songs a user could put on a phone at 100, which limited the popularity of those models.

Video, too, has been problematic for carriers.

For one, people don't have large video collections they tote around, Ask said. Plus, most people so far don't see the value in watching video clips on a 2-inch screen. According to Jupiter's research, Ask said only 1 percent of mobile customers watch video on their phones, and that figure is expected to rise to only 5 percent by 2010.

"Prices have to start to come down to attract more users," she said. "They are not interested right now."

The debate on the merits of mobile video has become so intense lately that an analyst report from Merrill Lynch last month called for ESPN to dump its phone service, which highlights clips from fans' favorite sports teams and ESPN shows.

The Merrill analysts previously said ESPN should attract 240,000 subscribers this year. Now, they say it will only attract 30,000. "It is time ... to pull the plug on Mobile ESPN," they wrote.

A spokeswoman for Mobile ESPN acknowledged slower sales than anticipated, but the company has made several changes to pricing, added new handsets and the service is now also sold at Sprint stores.

"Mobile ESPN is not for everybody," she said. "We've said that from the beginning. We're only 5 1/2 months into this."

Verizon hopes its new strategy will help jump start what has so far been low adoption rates for music downloads.

Some of that hope rests on the shoulders of LG Electronics' Chocolate phone, which will be in stores next week.

With a 2-megabyte storage card--sold separately--the Chocolate can store roughly 1,000 songs. The phone features a scroll wheel in front, similar to the iPod, to move quickly through a user's song library.

"We think it will draw music lovers to Verizon from other carriers," Nelson said. "And for our existing customer base, for real music lovers, this is something they will upgrade to."

Golvin said Verizon might be on the right track.

In order for mobile music to succeed, the complexity of the service needs to be removed, he said. "All the carriers need to provide some sort of freebie period to get people hooked."

ebenderoff@tribune.com

Source: Chicago Tribune

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