Apple Chomper

How Nokia can knock the iPod from its perch.

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Nokia N91

For months, tech pundits have anticipated the Nov. 14 launch of the Zune, Microsoft’s answer to the iPod. While everyone loves an old-fashioned Microsoft-Apple battle, the me-too Zune is too little, too late. The coming digital-music battle won’t be for control of the current market, which is defined and dominated by Apple. No, the real war will happen over the cellular networks. That’s why Apple’s greatest threat isn’t Microsoft. It’s Nokia.

I’m bullish on Nokia’s chances after spending the last week with the N91, part of the company’s line of multimedia phones. Constructed of matte stainless steel with silver and black plastic highlights, the N91 looks like any other candy-bar-style handset, albeit with a bit of extra heft around the middle. The most visible difference is the group of playback controls—pause, rewind, etc.—that takes up the area beneath the screen. To make a phone call, you slide down these controls to reveal a standard keypad. The other big difference between the N91 and standard phones is on the inside, where Nokia has installed a 4-gigabyte hard drive in place of the typical low-capacity flash chip. (The N91 I tested was released in April; a new version announced last month offers an 8-gigabyte drive and various small improvements.)

Music phones (most notably, Motorola’s iTunes-compatible ROKR) have gotten pretty terrible reviews. I was surprised, then, to discover how much I enjoyed the N91. All the traditional phone functions work flawlessly, and calls sound as clear as they do on my landline. There’s even a bare-bones e-mail application and a surprisingly powerful browser. Most significantly, the music player integrates with all of this seamlessly. If you’re listening to a song when the phone rings, it will pause until you finish your conversation, then resume automatically. The playback controls work no matter what else you’re doing, so you can rewind in the middle of writing a text message. A dedicated key next to the play button also lets you flip back and forth between “phone mode” and “music-player mode.” The sound wasn’t perfect—I noticed some skips when selecting a new playlist or flipping through songs—but it was remarkably good.

Transferring music from my laptop was relatively painless, too. The Nokia Music Manager installed without a hitch on my MacBook Pro and allowed me to copy my iTunes library with ease. (The N91, like all non-Apple devices, cannot play music purchased from the iTunes Store.) PC users can get even smoother integration—the N91 connects directly to Windows Media Player without the need for an external application.

The bottom line? The N91 is a good music player and a superb phone. That said, I wouldn’t buy one for the outlandish current price of $599 when you can get an iPod and a phone separately for less money. However, keep in mind that today’s music phones are for the early adopter crowd. Mobile-service providers are notorious for taking months to approve new phones for their networks, but once the N91 or a similar Nokia model is cleared, the Nseries won’t be for early adopters anymore—it will be a legitimate competitor to the iPod. Since the service providers subsidize phone prices to win customers, the 8 GB N91 probably will cost around $200-$250, about the same as the 8-gigabyte iPod nano.

Of course, competing with the iPod isn’t as simple as coming up with a cool product at a great price. Nokia also has to vie with the iPod’s “ecosystem”—iTunes software, the iTunes Store, and the vast market of iPod accessories. Nokia already has a good start. Last week, it acquired Loudeye, which is known for building “white label” music stores that companies can offer to consumers under their own brand names. Nokia’s plan is to build such branded stores—accessible directly from its phones—for mobile providers. And when it comes to the accessories market, Nokia is copying Apple’s strategy exactly: The company just opened sleek new retail stores in Chicago and New York, with more on the way. Nokia even hired one of the architects responsible for the SoHo Apple Store to design its own New York offering.

Obviously, Apple knows what it’s up against. In the last quarter, Nokia sold 88.5 million phones to Apple’s 8.7 million iPods. If the Finns can convince just a fraction of buyers to spring for music phones rather than iPods, they’ll trounce Steve Jobs and co. It makes sense, then, that all signs point to a music player-phone hybrid soon emerging from Cupertino, Calif. In September, an analyst with American Technology Research wrote that his sources indicated that “an Apple-designed smart phone has moved from concept to prototype and recently has progressed to near completion as a production unit.” A Prudential Equity Group analyst backed up the claim this month, writing that he expects Apple to unveil not one but two music phones in January.

Admittedly, iPhone rumors have been kicking around for years, and there are serious reasons to doubt Apple’s move into wireless. As the New York Times’ David Pogue has noted, one reason for skepticism is the control that mobile-service providers assert over phone makers. It’s hard to imagine a perfectionist like Steve Jobs allowing Cingular executives to dictate which icons can appear on the iPhone’s home screen or what kind of headphones can be included in the box.

A more fundamental issue is whether providers will welcome an iPhone onto their networks at all. Apple has built the iPod’s purchasing system around the computer; you browse and buy music using your PC or Mac. Mobile providers don’t like that model because they can’t charge you for it. The Nokia-Loudeye model lets them charge you not once but twice—first by selling you the wireless data service you need to access their music store and then by taking a percentage of each sale. If Apple and Nokia do go head-to-head, the providers are likely to take Nokia’s side. That is, unless Apple (uncharacteristically) decides to share its iTunes profits.

More than most, however, Apple knows the catastrophic results of squandering an early lead. If the wireless market begins to take off, Apple will not stand by. Nor, it seems, will Microsoft—gadget blogs already are buzzing with rumors of a Zune phone. Who knows, maybe there will be an interesting Microsoft-Apple fight after all.