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Nokia Gives Apple the Loudeye

What a week it has been for Apple (Nasdaq: AAPL  ) . First, on Monday, The Wall Street Journal reported ominous timing with respect to some of its stock options grants to executives. Then, at Tuesday's Worldwide Developer Conference, Apple disappointed overeager investors expecting a surprise announcement. (Which is weird, isn't it? How can you "expect" a surprise? Anyway, moving on.)

Both events led Apple shares lower; the stock was down 5% from Friday's close through Tuesday. Now there's more bad news: Nokia (NYSE: NOK  ) has acquiredLoudeye (Nasdaq: LOUD  ) for $60 million in an apparent assault on the iTunes music store.

A rhapsody of blue
How bad could it get? That's a tough question. I own shares of Nokia, so let's begin with the bull case for the deal. Nokia is already the world's largest supplier of smartphones, many of which carry the ability to play recorded music. In fact, BusinessWeekreports that Nokia's music-playing communicators outsold the iPod during 2005, 40 million to 25.5 million. It's a good bet that a musically gifted device sporting the Nokia brand will be attractive to global carriers wanting a cut of the big pie iTunes has created.

So what's the good news? Apple is strong exactly where Nokia is weak, here in North America. That's why I believe that if the two go head-to-head in supplying digital music stores to mobile carriers, as news reports suggest, it won't happen for some time if it happens at all. Besides, with the market for digital music growing as rapidly as it is -- sales tripled to $1.1 billion globally during 2005 -- there ought to be plenty of business for iTunes and its rivals for at least the next several years.

Unchain this melody
Nevertheless, Nokia has forced Apple into a tight spot. Downloads to mobile phones remain one of the fastest-growing segments of the digital entertainment market. Apple could take advantage by licensing iTunes to carriers. But that would require testing, integration, and some level of support, which carriers historically have been loath to provide. (Seriously, ask your carrier's local store for help sometime.)

More likely to me is that Apple will design its own hardware and software to ensure that the experience between the phone and the Mac (and, ultimately, the PC) is seamless. That's how Apple does business, after all. And history shows that loosely integrated entertainment services don't do all that well: Witness the lukewarm performance of the V Cast team-up between Verizon (NYSE: VZ  ) and Microsoft (Nasdaq: MSFT  ) . (Does anyone else think this is what prompted Mr. Softy to whistle a new tune?)

An end to the solo act?
Frankly, I don't believe Apple has much choice in this race. It's hard to see how carriers would make much from selling iTunes without raising prices, and yet Apple CEO Steve Jobs just pressured the recording industry to keep iTunes at $0.99 a pop. Why would he back off now?

What's more, Apple doesn't need to do another deal of the sort that brought consumers Motorola's (NYSE: MOT  ) ill-fated ROKR. The Mac maker could form a joint venture with a telecom specialist to construct the guts of an iPhone while maintaining strict control over the device's software and design. In some ways, it'd be like the original Macintosh project, which boasted an isolated team working without limits.

When the curtain falls ...
Whatever path Apple chooses, speed is of the essence. It shouldn't take Nokia long to digest Loudeye, which means carriers could begin selling tunes through Nokia-powered stores in a matter of months.

But if Apple has an iPhone to sell, it's a good bet carriers will want it. And the company could sweeten the deal for those that don't have a retail presence by charging fees to set up activation service in its own outlets. Conversely, what's to prevent Apple from sending you a coupon for a new Mac when you buy an iPhone at a Verizon store? Nothing, of course.

In sum, it's not yet clear where the battle lines will be drawn in the budding digital entertainment revolution. But they will be drawn. And when the smoke clears years (decades?) from now, there are likely to be multiple winners. Don't be too surprised if today's mortal enemies -- Nokia and Apple -- are both among the last to be standing.

High tech. Biotech.Nanotech. Any tech. David Gardner and his Foolish band of rebels cover it all for subscribers to Motley Fool Rule Breakers, leading the team to turn up four multibagger stocks in just two years. Want to find out who they are? Click here to try the service. Your pass is free for 30 days.

Fool contributor Tim Beyers owns shares of Nokia and LEAP options in Apple. You can find out what else is in his portfolio by checking Tim's Fool profile. Microsoft is a Motley Fool Inside Value selection. The Motley Fool has an ironclad disclosure policy.

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