By Michal Lev-Ram

Apple’s iPhone may reign over the fledgling mobile music market in the United States, but in the rest of the world Nokia is No. 1 on the hit parade.

Last year alone, Nokia (NOK) sold 147 million music-playing phones worldwide, while Apple’s (AAPL) sleek touchscreen has sold 5.7 million units so far this year. And although the iPhone is now the top-selling music phone in the U.S. market, it doesn’t even make the top five in Europe where three of Nokia’s music-playing handsets are best-sellers. Now the Finnish phonemaker plans to launch a new service later this year that will let people download as many songs as they want for a limited time.

Unlike the iPhone’s pay-per-track model, Nokia’s new “Comes With Music” plan will offer several handsets that include a year’s worth of unlimited music in the cost of the phone. Once the year is over, subscribers will be able to keep their existing tracks on their phone or PC, and Nokia says they’ll have several options of extending their “Comes With Music” membership without necessarily having to upgrade to a new device. The company is still mum on what those other options may be, though it’s likely customers will have to start paying a subscription fee to keep the unlimited downloads service.

“The track-by-track purchase methodology was cumbersome to people,” says Liz Schimel, head of Nokia’s music business. “Consumers were looking for a more seamless way to access a lot of content.”

Subscription-based, all-you-can-listen-to digital music models have been around for a while. Companies like U.K.-based Omnifone and Rhapsody offer similar services and for years rumors have circulated that Apple itself will launch a flat-rate, unlimited version of iTunes. But Nokia is the first mobile giant to turn away from the a-la-carte model of selling mobile music, and, unlike other existing subscription-based services, its will allow people to keep their tunes on their phone and PC even after their subscription expires.

Of course, while customers won’t have to worry about losing their music library, they also won’t be able to transfer their songs to a new device unless that new device is another “Comes With Music” Nokia phone.

The company plans to launch several compatible handsets, as current Nokia music phones won’t work with the upcoming service. It’s not clear how much built-in memory those new phones will have, but one of Nokia’s most popular multimedia phones on the market today is the N95, which, like the iPhone, comes in an 8-gigabyte version.

Lucky for the Finnish phonemaker, analysts say content providers are eager to experiment with new ways of getting their music onto cell phones.

“They [content providers] want to at least try to shift the center of gravity away from iTunes and Apple,” says Mark Donovan, a senior analyst with mobile research firm M:Metrics.

Two of the world’s largest music labels - Universal Music Group and Sony BMG - have already committed to “Comes with Music,” and the company expects more will sign on before the new service launches in the second half of this year.

Nokia won’t disclose the details of the new business model, or say how much the “Comes With Music” devices will cost. Some media reports have suggested the phonemaker is paying $35 to Universal alone for each handset it sells. With more labels expected to join the partnership, that could end up cutting into Nokia’s profit margins, though M:Metrics’ Donovan says he believes the company has figured out a model “that has legs.”

“The idea that they would pay Universal $35 a handset doesn’t smell good to me at all,” says Donovan. “But of course the devil will be in the details.”

Schimel, head of Nokia’s music business, says the company put a lot of energy into crafting a model that makes sense for everyone involved - the music labels, customers, carriers and Nokia itself. The result, she says, will be able to compete with lots of players on the marketplace, including Apple.

“The mobile industry as a whole has enormous potential in digital music but up until now it’s only been unlocked to a limited extent,” says Schimel, who would not disclose the specifics of the “Comes With Music” business model.

One thing Nokia has been clear about is that music and other services are an important part of its overall strategy. In 2006 the company acquired digital music player Loudeye, which enabled it to launch a pay-per-track mobile music store (similar to what’s currently available on the iPhone), now available in nine countries.

But it’s Nokia’s “Comes With Music” service that has the potential to disrupt the prevalent iTunes way of selling digital music - at least when it comes to mobile downloads.

Despite Apple’s dominance in MP3 player sales, Nokia’s got a global headstart when it comes to the mobile phone market. It’s got 40% of the global handset market and is especially strong in regions that have been quick to embrace mobile content, including China and Europe.

Of course, providing a viable competitor to Apple’s iTunes means succeeding in the U.S. market as well. Currently, Nokia has just 7% market share in the United States, and its total North America sales accounted for only 2.6% of its overall, global revenues.

Nokia’s Schimel says although it won’t be one of the launch markets Nokia has every intention of eventually bringing its “Comes With Music” service to the United States.

But it’s possible Apple will be pressured into change its tune — and offering a subscription-based iTunes service — long before that happens.

By Michal Lev-Ram

Is Motorola really considering getting rid of its cell phone business? Don’t count on it — at least not anytime soon. Despite mounting pressure from activist investor Carl Icahn to sell or spin off the money-losing division, the company still seems convinced it can revive the once high-flying division.

Since January, when it issued a vaguely-worded statement that it would explore “the structural and strategic realignment of its businesses,” Motorola has been been signaling it intends to hold on to the handset unit.

Case in point: At a recent Morgan Stanley technology conference, Motorola (MOT) chief executive Greg Brown said the key to a turnaround will be led by a new and improved lineup of phones.

“At the end of the day, I think that the recovery of that business will be primarily product portfolio led,” Brown said, adding that he is focused on bringing out a wide range of new devices across “different technologies, geographies, price points and tiers.”

Brown also told his audience that he is actively searching for an executive to run the company’s mobile devices business. “We want someone steeped with experience, ideally having some technology familiarity or orientation,” he said.

Brown himself has been running the handset unit since early February. The CEO says he now spends about 80% of his time on the division, which posted a fourth-quarter operating loss of $388 million in January

Some industry insiders say they’re not surprised.

“Their message has consistently been that they were going to fix it themselves,” says Robert Laikin, CEO of cell phone distributor Brightpoint (CELL). “I never thought they were going to sell it.”

Others say Motorola tried selling its mobile devices unit but couldn’t find any takers. According to recent reports, both LG and Sony Ericsson have said they are not interested in buying the cell phone business.

In the meantime, Icahn raised his stake in Motorola to 6.3%, up from 5%. Gearing up for the company’s annual shareholder meeting in May, Icahn is pushing to put four favored executives on the phonemaker’s board, including Keith Meister, who manages the shareholder’s various businesses. Icahn has said his proposed directors will “assist Motorola” in executing the company’s “long over due decision regarding the separation of its mobile devices business.”

Motorola has asked its shareholders to reject Icahn’s nominees. A company spokesperson also said Motorola continues to evaluate its options in regard to the cell phone business.

It’s clear Brown is trying to buy more time to clean up the mess himself. If the company’s mobile division is able to show signs of improvement, that will make it more attractive to potential buyers or partners. Then again, if Brown manages to revive the cell phone unit business himself, why he would want to get sell off his fixer-upper is finally starting to show signs of life again?

Either way, Motorola’s CEO acknowledges it could take into 2009 for the company to get back on track. By then, other phonemakers — including Nokia (NOK), Samsung, Sony Ericsson and LG — could continue to eat away at what’s left of Motorola’s worldwide and U.S. market share. As for Icahn, you can bet he’ll keep agitating.

By Michal Lev-Ram

Want to know what the cell phone of the future will look like? Nokia offered a glimpse Monday when it unveiled its new “Morph” concept phone, a solar-powered, self-cleaning and shape-shifting mobile device.

Based on the company’s research in nanotechnology — the science of building electronics at the subatomic level — the phone will be made out of material that can change into different shapes. In a video illustrating what Morph might someday be able to do, Nokia (NOK) shows the flexible device transforming from a traditional mobile phone with a detachable ear piece to a flat, paper-thin gadget and a wearable watch. It also shows the transparent, green device tapping solar energy, sensing chemical compounds in the air and repelling dirt particles.

According to Tapani Ryhanen, head of Nokia’s multimedia devices research, the company developed the Morph concept in collaboration with the University of Cambridge and has 18 of its own researchers working full-time on nanotechnology-based solutions.

But don’t put off buying a new phone just yet — Ryhanen says a Morph-like device is still at least 11 years away. What’s more, even when it does get out of the lab, it’s not clear exactly what it will look like.

“Our concept device is just to illustrate what this technology could mean, but most likely it is not exactly the device we will develop based on our work,” Ryhanen told Fortune.

Nokia’s not the only phonemaker turning to nanotechnology for future phones. Other companies, including Motorola (MOT), are also looking into the technology to help shape next-generation devices.

“In some way or another, many phone companies are involved in nanomaterials research,” says Pulickel Ajayan, a professor of engineering at Rice University and a pioneer in nanotechnology. Ajayan says nanomaterials can enable better screen resolution, increase processing power of memory devices like phones and enhance battery life. “I think that if all of these pieces are put together nanotechnology will be quite significant for mobile devices, as these are the basic components of phones — things like power, display and memory.”

Ajayan says we could see nanotechnology used in phone displays and energy storage in the next two to three years. But you’ll likely have to wait a lot longer for the luxury of turning your phone into a watch simply by placing it on your wrist and locking in its shape.

For now, you can check out the Morph concept phone on display at New York’s Museum of Modern Art on view until May 12 as part of the museum’s “Design and the Elastic Mind” exhibition.

By Michal Lev-Ram

Looks like no one bothered to tell Nokia that there’s an economic downturn in progress. The Finnish phonemaker issued a strong fourth-quarter earnings report Thursday, announcing that profits rose 44 percent from a year ago to $2.66 billion while sales spiked 34 percent to $22.8 billion.

On a conference call with analyst Thursday morning, chief executive Olli-Pekka Kallasvuo called it an “impressive fourth quarter” and said that Nokia’s performance “seems at odds with the volatility we are all witnessing in the equity markets and financial sector.” Not that he’s complaining about that, of course.

The world’s largest phonemaker also announced that its global market share grew to an estimated 40 percent in the fourth quarter. The company shipped 133.5 million handsets in Q4, almost three times the number shipped by its closest rival, Samsung, as Nokia CFO Rick Simonson pointed out during today’s call with analysts. That’s an average of a mind-blowing 1.5 million phones a day — put in perspective, by the time you finish reading this article Nokia (NOK) will have shipped about 2,000 handsets.

Most of the growth is coming from developing countries like India and China, where millions of new wireless subscribers are buying their first cell phone each month. Nokia has been successful at hawking its low-cost devices in these countries. It recently unveiled two new handsets, the Nokia 2600 and Nokia 120, which feature exchangeable covers and are geared for emerging markets where many consumers share their handsets. In mature markets like Europe, its multimedia Nseries line sold over 11 million units this quarter. The high-end N95 (which retails for about $700 in the United States) has been Nokia’s “number one profit contributor,” said Kallasvuo, who added that almost six million phones have been sold since the gadget became available last year. Nokia is also hoping that its pending acquisition of digital mapmaker Navteq and Internet strategy will help provide new revenue opportunities in 2008 and help distinguish itself from competitors.

But not everything is rosy for the Finnish company. CFO Simonson acknowledged Nokia’s weak position in the United States, saying that the U.S. market accounts for a mere 5% of Nokia’s revenues. The company hasn’t always had the best relationships with U.S. carriers. For one, Nokia is dominant in GSM phones — the world standard — while the United States has been a CDMA-heavy market. To the carrier’s ire, Nokia’s also has tried pushing its own services and sells unlocked phones that will work on multiple carriers’ networks.

Nokia’s faces problems overseas too: Earlier this month it announced it would close down its Bochum, Germany, manufacturing plant, triggering a protest by some 15,000 people outside the gates. The backlash was so bad thatKallasvuo addressed the problem in Thursday’s call, explaining that labor costs in Germany are not “competitive enough,” but he said that the company will negotiate with the plant’s 2,300 employees to ensure a fair settlement

“The handset market is strong,” Kallasvuo told analysts.

By Michal Lev-Ram

LAS VEGAS — While Korean mobile phone manufacturers LG and Samsung Electronics made significant headway in mobile sales last year, they’ve come empty-handed to the Consumer Electronics Show, a showcase for companies to introduce their hottest new gadgets.

Ehtisham Rabbani, vice president VP of product strategy and marketing for LG’s mobile phone business, said cell phone sales rose 28 percent in 2007 but he was vague about what new mobile gadgets consumers could expect to see in 2008.

“We plan to keep doing what we’ve been doing in 2007,” says Rabbani.

Samsung, meanwhile, will unveil plenty of consumer electronics like Wi-Fi enabled HD video camera and new flat screen televisions in Las Vegas, but the only “new” phones were new only to the U.S. market as they’d already been introduced in other countries.

In 2007, LG — the fifth largest mobile phonemaker — unveiled two new touchscreen devices, the Venus and Voyager. Samsung, meanwhile, overtook Motorola (MOT) as the No. 2 cell phonemaker in the world late last year behind Nokia.

“Samsung gained a lot this year partly because Motorola has been doing so poorly,” says Tina Teng, a wireless analyst with technology research firm iSuppli. “It’s a big win for them.”

Teng says that in addition to Samsung benefiting from Motorola’s recent poor performance, the Korean company also prospered by concentrating on mid-to-high range handsets to gain market share in a highly profitable segment. She says Samsung is now the No. 2 player in the European market — Nokia’s (NOK) home turf. Key to Samsung’s success there has been stylish, multimedia-centric mobile phones.

Both Korean phonemakers could have an advantage over Motorola in the fast-growing Indian market because they already have brand recognition in that country due to their lines of household appliances like refrigerators, televisions, and washing machines.

While Samsung’s market share has been growing in Europe and Asia, it has yet to have a big hit in the U.S. market. And LG, while strong in sales of CDMA phones sold primariy in the U.S., Japan and Korea, it’s weak in development of the GSM phones used in most countries.

By Michal Lev-Ram

Remember when phone companies just made phones? That strategy no longer works in today’s Internet-accessing, mobile-gaming and MP3-playing world - and it definitely won’t work in 2008. That’s why Nokia (NOK), the world’s largest phone manufacturer, is in the midst of a reorganization it says will help the company grow beyond phones and cellular equipment. The new corporate structure, which takes effect January 1, 2008, will divide the Finland-based company into three main units: Devices, services and software and markets. It’s the services and software part that stands out for a phone manufacturer - typically more concerned with churning out devices than with providing services.

But the reorg is just part of newish CEO Olli-Pekka Kallasvuo’s overall strategy of morphing Nokia into a mobile Internet company, not just a phonemaker.

“The convergence of the mobile communications and Internet industries is opening up new growth opportunities for us, both in the devices business as well as in consumer Internet services and enterprise solutions,” Kallasvuo said last June when he first announced the reorg. Since he took on the chief executive role in 2006, Kallasvuo’s already led Nokia through several software and services-related acquisitions - including digital mapmaking giant Navteq, photo-sharing service Twango and Avvenu, a Palo Alto, Calif.-based company that lets users access content on their PC via cell phone. He’s also announced the launch of Ovi (which means “door” in Finnish), a one-stop Web portal which will combine Nokia’s various mapping, music, gaming and other mobile services. Some Ovi offerings are already available to wireless users in the United Kingdom, but recent software delays (welcome to the biz, Nokia) have forced the company to postpone the launch of one of its most anticipated services - a mobile gaming platform called N-Gage.

The shifting focus on software rather than pure hardware is a big step for the wireless industry. What’s more, it’s being pushed forward by many different types of companies (not just mobile operators) and could therefore end up driving competition and, ultimately, improving the consumer experience. But according to iSuppli analyst Tina Teng, the move is nothing new for Nokia.

“Nokia’s been doing this for a long time, and this is just the next step in moving beyond the devices themselves,” says Teng, who adds that the company’s music service in particular could be a game changer and a threat to carrier-operated stores, much like Apple’s (AAPL) iTunes. “Just look at what Apple did with their Wi-Fi enabled iPhones - you don’t have to go through the cellular networks to download music anymore.”

Speaking of Apple - the extension to software and services also means that Nokia’s circle of competitors is also growing. Once restricted to traditional phonemakers like Motorola (MOT) and Samsung, the company could soon find itself neck-and-neck with cellular operators who would rather sell their own branded services, Internet-centric companies like Google (GOOG) and Yahoo (YHOO) and mobile newcomers like, you guessed it, Apple. That’s probably why, as part of Nokia’s upcoming reorg, its new chief technology officer Bob Iannucci will be based in Palo Alto, the heart of Silicon Valley, and not in the company’s Finnish motherland.

Of course, while the demand for rich mobile experiences like location-based navigation applications, mobile Web access and on-the-go gaming is growing in many developed countries, lots of people - about 50 percent of the world’s population - are still just waiting to get their hands on their first cell phone. That means that Nokia still needs to focus on spreading and improving its physical goods. Sure, with an estimated 39 percent global market share the company’s the largest phone manufacturer in the world, but, as Motorola recently demonstrated the tables can turn much faster than you think - one minute you’re riding high on the Razr’s success, the next you’re posting a $138 million quarterly loss on your handset business.

As for Nokia, it will be a while before the results of the company’s reorg can be measured. For now, the Finnish phonemaker just needs to kick the door open - by launching Ovi, that is.

Just days after launching an 8-gigabyte version of its popular N95 mobile phone, Nokia (NOK) unveiled yet another device in its multimedia products lineup. The new N810, though, is no phone – it’s an 8-ounce Internet-optimized machine.

At a launch event this morning in San Francisco, Anssi Vanjoki, executive vice president of Nokia’s multimedia group, called the device a “full-fledged computer.” With a Mozilla-based browser, media player, video chat features and a built-in Skype application and GPS, the portable N810 comes close. It’s not bad-looking either – the large 4.13-inch display makes for readable Internet pages (the iPhone’s screen, by comparison, measures in at 3.5 inches). There’s also a sleek-looking, pullout QWERTY keyboard and an attractive user interface. But, while the device has built-in Wi-Fi and can connect to your mobile phone via Bluetooth technology, it doesn’t have cellular capabilities itself. That means that – at least for the time being – it has to be used in conjunction with a cell phone. At $479 a pop, that might be a tough sell.

“This is a clean Internet device,” said Vanjoki, who says he recognizes the N810 will not become Nokia’s most successful product. It’s more about the end result – Vanjoki’s five-milestone roadmap, which has already included two more rudimentary iterations of the Internet tablet (the N700 and the N800). The ultimate goal? Merging the full capabilities of the N810 with those of a cellular phone – such as the N95. But getting to that point, said Vanjoki, would be a matter of years, not months.

The N810 fits in well with Nokia’s new strategy of evolving into an Internet player. That’s why the Finnish company has been busy acquiring software players – such as mapping provider Navteq. That’s also why Nokia chose to unveil the N810 Internet tablet the morning of San Francisco’s Web 2.0 Summit and not next week, when CTIA – a wireless show that will take place in the same city –kicks off.

In keeping with Nokia’s new, Internet-focused identity, the N810 runs on a Linux-based operating system, which means that it will be open to outside developers who want to build applications specifically for the device. According to Nokia, its developer forum already has more than 3.4 million registered users.

“We encourage our users to tamper with their devices,” said Vanjoki in an obvious reference to Apple (AAPL), who recently got flak for “bricking” (i.e., rendering useless) iPhones that had been modified by their users.

In fact, Vanjoki said the issue of closed versus open phones represented a “deep philosophical difference” between Nokia and Apple. Just this morning, though, Apple CEO Steve Jobs finally announced that a developer kit for third-party software application developers would be available early next year.

But the N810 could have other challenges – unlike the iPhone, which is available throughout AT&T stores nationwide, the N810 will not be sold through any comparable stores in the U.S., as it is not a cellular device.

Vanjoki is well aware of the competition Apple represents, both in terms of future plans for the N8100 and the current N95 – a full-feature phone that many are calling an iPhone competitor.

“We are competing with Apple on all fronts with all cylinders,” said Vanjoki. “Let the best man win.”