Phonemaker to use Microsoft products in digital music headsets; Microsoft agrees to open standards.

February 14, 2005: 9:14 AM EST

HELSINKI (Reuters) - The world`s largest mobile phone maker Nokia and software company Microsoft struck a deal Monday to make it easier for consumers to buy digital music on-line and play it back on their handsets.

In a comprehensive agreement, which involves a separate deal with digital media company Loudeye, Nokia agreed to put Microsoft`s music player software into its handsets.

In return, Microsoft (Research) will introduce open standards for digital music compression and piracy protection in its Media Players for personal computers.

``Users can synchronize their music collection with their mobile device,`` Nokia (Research) said in a statement.

``This agreement makes it easier for consumers to download music they want to listen to, without having to worry about whether or not the file format is supported,`` said Nokia Multimedia unit head Anssi Vanjoki in a statement Monday.

A Nokia spokesman told Reuters the firm would launch a phone in 2005 that would support Windows Audio.

The deal brings together two long-time rivals, with Nokia previously using either in-house or RealNetworks (Research) music and video software. It said it sold 10 million phones in 2004 with an integrated music player.

In its audio player, Microsoft will introduce the open AAC format that shrinks audio files, as well as anti-piracy software from the Open Mobile Alliance (OMA). Nokia and Loudeye (Research) agreed they would start selling a music download service directly to mobile phones that will use the same AAC and OMA technologies.

Nokia will add Microsoft`s Windows Media compression and playback technology to the digital music players in its handsets. At a later stage, Nokia will include Windows Media`s anti-piracy technology, used in many online music stores.

Breakthrough for Microsoft

The deal is a boost to Microsoft, which until now has had little success penetrating the mobile handset market. It has tried to push a slimmed-down version of Windows for use in so-called smartphones, which offer limited PC-type functions such as e-mail, but its market share is below one percent.

On the back of Nokia`s formidable market share of one-third of the 684 million-units-a-year handset market, the Redmond, Wash.-based software company has a much bigger opportunity to get its media player software into handsets around the world.

The software maker hopes it will encourage consumers to buy more songs in online Internet music stores that use its compression and anti-piracy software. Internet music stores, including market leader iTunes Music Store from Apple (Research), offer music in their own proprietary formats.

For Nokia, it means it can start riding the wave of digital music download services that have become popular recently.

Nokia said that the deal with Microsoft would not affect its relationship with RealNetworks. The two firms said earlier this month that they were expanding cooperation to bring video and music players to more Nokia phones.

``With Real, there has been more of a focus on the video side of things,`` a spokesman said.

The separate deal with Loudeye also offers a surprising change in industry politics, because until now Loudeye only sold Internet download systems that run on Microsoft software.

Loudeye`s entry into mobile download services with Nokia means it has embraced the open standards.

Nokia said the mobile music platform from Loudeye will let users browse, search, listen, and download songs and ring tones either to their phones or to their computers. The fees will appear on users` monthly phone bills.

Mobile services operators around the world are pushing hard for open standards so that consumers are not confined to only one format for playing the songs they legally purchased.

The Loudeye/Nokia service is ready to use in over 30 countries, and the companies expect to strike deals with operators for its use in the next couple of months.