By Georgina Prodhan and Tarmo Virki

FRANKFURT/AMSTERDAM (Reuters) - Nokia's plan to offer unlimited music downloads challenges the dominant pay-per-track sales model and is likely to upset carriers already worried that Nokia is poaching their customer relationships.

The world's biggest cellphone maker announced a deal on Tuesday with top record label Universal that will give customers buying particular Nokia devices unlimited access to millions of tracks for a year and allow them to keep the music afterwards.

Nokia hopes the deal with Universal Music Group -- a unit of Vivendi whose artists include 50 Cent, Sting and Mariah Carey -- will be followed by deals with the three remaining major international labels, to whom it is already talking.

Such unlimited download models could offer a shot in the arm to the music industry, which is struggling to find ways to make up for falling CD sales -- something that pay-per-track online stores like Apple's iTunes have so far failed to do.

"Unfortunately it appears that the only way to drive mass market adoption of digital music will be give it away for free, or close to free," Mark Mulligan, analyst at Jupiter Research, wrote in his blog.

"But if the alternative is for people to be downloading for free from illegal networks where the labels get nothing, it's pretty clear which is the preferable option."

Research firm Understanding & Solutions estimates that mobile music represents about 13 percent of global recorded music retail value. The mobile music market should grow to $11 billion by 2011, it says.

Nokia and Universal did not disclose financial terms but Universal's digital operations chief, Rob Wells, told Reuters in an interview: "Unless there was enough money for the world's biggest record company we would not have agreed to the deal."

Nokia's new venture, due to start in the second half of next year, comes hard on the heels of its August unveiling of an Internet mapping, music and gaming service designed to take a greater share of consumer spending from mobile operators.

And the so-called "Comes With Music" offering announced at an investor event in Amsterdam on Tuesday looks set to cut out -- and upset -- operators in a similar way.

"Due to their scale and newly acquired aggressive Internet strategy Nokia are in a unique position to turn the mobile music market on its head," Jupiter's Mulligan wrote.

CARRIERS SCRAMBLE

Telecoms carriers have launched a flurry of offers to try to regain the initiative and the high profit margins associated with popular services like music downloads.

Vodafone , for example, launched an unlimited mobile music service, MusicStation, in Britain last month in partnership with pioneering British music firm Omnifone a week before the UK debut of Apple's iPhone.

Omnifone says UK customers are signing up for MusicStation at the rate of more than one a minute. It aims for its services to be accessible to 100 million consumers around the world by June 2008, up from 45 million now.

Omnifone has a more carrier-friendly business model in which it shares revenues with operators and record labels. It has deals with all four major music labels as well as independents and has customers in Sweden, Hong Kong and South Africa.

MusicStation offers unlimited music at a starting price of about 35 pounds ($72) per month including some voice and text use, or 1.99 pounds a week for pay-as-you-go users, on a wide variety of handsets.

But, unlike the Nokia-Universal offer, customers cannot burn their music or transfer it onto a PC, meaning it is lost after the contract expires. They can share music with other MusicStation customers while their contracts are current.

Omnifone Chief Executive Rob Lewis said he welcomed Nokia's announcement, which he said would boost the market for unlimited music. "There's no longer any need to imitate the a la carte model of the iPod," he told Reuters in an phone interview.

"This is a very bold statement from Nokia, attempting to secure an element of the relationship with the end consumer that traditionally the operator has held very dear," he said.

"We've known for some time there's going to be a substantial battle in this space," he said, predicting a stormy six months ahead. "There's clearly going to be a rush to beat them."

(Reporting by Georgina Prodhan)
© Copyright 2007 Reuters.