The Apple iPhone has had a dramatic impact on the mobile phone market particularly in the area of music. About a year ago I wrote a posting entitled Is Apple’s iTunes Monopoly About To Die?, which attracted a blast of flame from Apple fans.

Apart from a barrage of insults along the lines of “You must be a moron if you don’t realise that Apple rules the universe, or at least the entire galaxy”, the main objection to the possibility of there being another viable music provider was that the Omnifone business model of a regular $3.50 per week rental of “all you can eat” would simply not work, because “the rental is far too high” and people like to own their music (even if they stole most of it).

I’m no longer the only analyst who’s suggesting that “all you can eat” will dominate. According to the following news posting, Juniper Research has come to the same conclusion, and expects the “all you can eat model” to overwhelm the music purchase model by 2012. In the space of a year, the mobile industry has changed and the agent of change is, of course, the iPhone. Kudos to Apple for producing such a well-designed consumer device.

Apple’s Position in the Mobile Market

The company most threatened by the iPhone was Nokia and consequently Nokia has moved quickly to try to neutralize some of the impact of the iPhone. It has more time than you might initially imagine to catch up, because Apple pursued a model of exclusive iPhone deals with carriers in each region. Such deals were good for Apple, because it meant that the carrier would make the necessary engineering investment to build the edge network that the iPhone needs (until it supports 3G) and it also meant that Apple could claim a regular monthly rental (part of the monthly charge from the carrier) for every legitimately connected iPhone.

However, Apple will not have failed to notice that the number of illegitimately connected iPhones is startlingly high – somewhere in the region of 20% of all iPhones – and in the long term that’s good for Apple, because it can gradually let the exclusive deals lapse and sell direct to a larger market. It would lose rental revenues, but sell more units.

As far as the carriers that have agreements with Apple are concerned, they get an immediate one-time boost of subscribers, which is worth hundreds of millions, if not billions of dollars of subscription revenues to them. They are happy too, even if their local advantage disappears in time.

The Handset Makers

The success of the iPhone is a huge challenge for Nokia and other handset makers, as they need to get level with Apple as fast as possible. Part of Nokia’s response has been its “Comes With Music” program which will launch in summer of this year. The idea is that your phone comes with one year’s subscription to an unlimited number of songs – although initially it will only be songs from Universal, which limits it to roughly 40% of all music recordings. Nokia will undoubtedly expand that. After the one year, there will be a subscription.

This is not good news for the carriers, by the way, because the subscription is embedded in the phone, so their revenues from it reduce to “line time”. This pushes the handset market towards an embedded music model, and according to Omnifone, there will soon be other handsets available with music built in – it has some deals of this kind in the pipeline.

The upshot is that the mobile music market is likely to move quite swiftly to an “all you can eat” model. The typical mobile user switches phones very couple of years or sooner, and it is likely that the handset makers will offer a “free forever” model, knowing that it only means free for a couple of years. For their part the carriers may even start to include such phones free in their usage contracts.

As we approach this point, consumers will conclude that music is “free” and the current iTunes model will be completely broken. From Apple’s perspective, it will be a shame, but no disaster because iTunes will also become a subscription engine for “all you can eat”. Its monopoly will be broken, but its music assets will still be very valuable.

Apple, Nokia and Omnifone will own the music distribution engines. The big winners will be the music labels. They will see the phenomenon of music theft gradually fade away.