Not content with just connecting people, Nokia changes the settings on the mobile industry

With the opening of a flagship store on Regent Street, the handset giant will step up its drive into areas once controlled by the operators
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The Independent Online

Mobile handset giant Nokia plans to open a three-floor retail shop on Regent Street early next year. The shiny, shocking blue outlet will change more than just the face of the 19th century building previously occupied by the Dickins & Jones department store, which closed last year. The West End shop, across the street from the Apple store, will signal a reversal of power in the $730bn (361bn) mobile industry, away from operators and towards handset and internet companies.

Nokia is shattering the traditional control long enjoyed by mobile operators such as Vodafone, Orange, O2 and T-Mobile in selling goods and services. So far, phone vendors like Nokia, Samsung, Motorola and Sony Ericsson have sold hardware to the operators, which steeply discount them to consumers with charges for services such as voice and text messaging.

But as phones increasingly tie into the internet, the likes of Nokia want in on services such as music, games and video. They and the entertainment industry are frustrated with the carriers' own stumbling efforts to turn phones into all-singing, all-dancing devices, so Nokia is asserting its own "direct-to-consumer" strategy. Not only is it opening slick, high-rent shops around the globe Regent Street follows sites in Moscow, Hong Kong, New York, Helsinki, Chicago and Mexico City but it is launching services such as a music downloading site that went live last month.

"This world doesn't work the way the old one worked," Nokia chief executive Olli-Pekka Kallas- vuo said in the summer when announcing the music site as part of an ambitious services push called "Ovi" Finnish for "door".

Last Tuesday, he moved Nokia further into services when he and Universal Music chairman Lucian Grainge announced that the phone company is to offer millions of "free" songs next year. Nokia did not reveal how much it is paying Universal, but under the plan it will sell handsets at a premium to users, who will be able to download millions of songs at no charge for a year.

Carriers probably don't like the look of this. It could deprive them of business and it also ushers in a business model that is the opposite of theirs, which relies on giving away phones to hook users on to services. Too bad, because as Mr Kallasvuo noted last week, the industry is now full of "new directions and new competition".

He can make bold proclamations of change because Nokia has clout. It dominates the international handset market with a near-40 per cent share. And according to the Interbrand consultancy, it ranks as the world's fifth leading brand, ahead of iconic labels like Toyota, McDonald's, Disney and Apple.

Nokia also has little choice. Apple has invaded its turf by launching the iPhone along with a business model that siphons users away from operators' entertainment services and on to iTunes. Furthermore, most American and European users who put music on their phone don't buy it over cellular airwaves from carriers like Vodafone. Rather, they transfer it from their PCs, according to research firm M:Metrics. Nokia's online Music Store, like Apple's iTunes, lets them do that. Unlike iTunes, it also lets them buy over cellular airwaves straight from Nokia.

Big internet brands like Google and Microsoft are also moving aggressively into the mobile business. According to Mr Kallasvuo, the world has over three billion mobile phone subscribers, whereas there are only one billion PCs. So the internet powers are eyeing mobile as a huge source of growth, with unconventional business models such as giving away voice calls supported by mobile advertising. Nokia does not intend to cede new business to Google and co.

"The competitive dynamics are different as these people don't apply the same business model," Mr Kallasvuo told analysts gathered in Amsterdam last week. "You have to be extremely alert in order to be competitive against people using a different model. We have to have a strategy around each of these people separately."

Not that Nokia is cutting ties with operators. "We will continue to be a device company, but on top of that we'll take the services opportunity," Mr Kallasvuo said.

Keeping carriers happy while selling their own services will be a tricky balancing act. After all, Vodafone chief executive Arun Sarin told the Financial Times in late November that "whoever comes into the marketplace is going to have to work through us". He added: "The simple fact that we have the customer and billing relationship is a hugely powerful thing that nobody can take away from us."

"Some operators see it as encroaching on their territory and they're not happy," said Jonathan Arber, an analyst with London telecoms research firm Ovum. Indeed, when Nokia first announced its Ovi service, Orange responded by publicly refusing to stock Ovi-enabled phones. The company sells music through its Orange World portal

But since then, said Mr Arber, "there's been a bit of a cultural shift among some operators". In surprise moves, Vodafone, O2 and Italy's TIM all recently agreed to stock Nokia phones that link to the Music Store. John Delaney, another analyst at Ovum, likened Vodafone's partnership with Nokia to a famous Lyndon Johnson quip about ex-FBI boss J Edgar Hoover: "It's probably better to have him inside the tent pissing out, than outside the tent pissing in."

Outside music, Nokia has been dabbling for a long time, adding links to search engines, to photo-sharing sites and news pages. It's also been on an acquisition binge, picking up, among others, mobile advertising specialist Enpocket and agreeing to acquire navigation firm Navteq for $8bn.

The London emporium will announce that Nokia sells services and style as well as phones. Not bad for a Finnish firm that began in timber in 1865 and not long ago sold boots to the Soviet army. The mobile industry, like Regent Street, is changing.

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