By Tarmo Virki

HELSINKI (Reuters) - Nokia, the world's top mobile phone maker, will launch its free music package on Thursday, issuing a challenge to Apple's dominance of the digital music market.
Nokia is expected to unveil more details of its "Comes with Music" package at an analyst and media event in London. The Finnish firm will also launch its first touch-screen phone, to rival Apple's popular iPhone, sources have told Reuters.
"Comes with Music" and similar products from other hardware vendors could help the music industry make up for falling CD sales and cut illegal downloads.


The battle for mobile music is increasingly crowded, with Sony Ericsson launching its music package this month in Sweden, while South Korea's LG Electronics plans a service similar to Nokia's.

Nokia's package will differ from others on the market as users can keep all the music they have downloaded during a 12- month subscription period. There are no charges for tracks downloaded, since the cost is bundled to the phone price.

"'Comes with Music' could potentially bring free music to millions of consumers, radically changing the music industry, and offering a significant threat to Apple's dominance," Strategy Analytics' David MacQueen said in a research report.

"In a market where price and selection are so much more important than brand to consumers, Apple cannot count on retaining users when competing with an offering which seems free to the end user."

Nokia stock was 1.1 percent softer at 12.97 euros ahead of the expected news versus a 0.34 percent firmer sector index. The stock has more than halved in 2008 on industry growth worries and Nokia's third-quarter market share warning in September.

PUSH INTO SERVICES

The music download package is Nokia's first major push into the services business. Last year the company unveiled a revamp of its whole organization, aiming to build a new business from Internet services to combat slowing handset growth.

"'Comes with Music' sees Nokia going head to head with new competitors -- most notably seizing the initiative from Apple," said CCS Insight analyst Paolo Pescatore.

Nokia has acknowledged the impact Apple has made on the industry with its iPhone over the past year, saying the Cupertino, California-based computer and consumer electronics company had done the mobile phone industry "a big favor."

"We have a new, credible competitor in this business," Nokia Chief Executive Olli-Pekka Kallasvuo told the Churchill Club on Wednesday, a speakers' forum for Silicon Valley civic leaders.

"Of course we need to be able to respond to any competitor and we will."

Michael McGuire, analyst with Gartner, said Apple and Nokia are set to fight for the same market, but with different approaches, as Apple charges per-track-downloads, while Nokia's offering is more of subscription service.

HOPING TO CUT FILE-SHARING

Last month Nokia unveiled the first "Comes with Music" model, a new version of its successful 5310 phone, and said it will go on sale this year.

Nokia is expected to publish pricing details or a sales start date on Thursday. Carphone Warehouse last month said on its website that sales would start Oct 17, but later removed the information.

Analysts said the choice of a relatively cheap model was a clear indication Nokia was trying to win over consumers who often are not paying for music but getting it through file-sharing sites on the Internet.

"I think this is the first time the music industry can state they have a proper tool to fight file-sharing," said Mark Mulligan, analyst at Jupiter Research.

Recent survey from research firm Strategy Analytics shows there is demand for music packages -- 84 percent of consumers said they would pay for a service like "Comes with Music", with 34 percent willing to pay $10 or more per month.

(Reporting by Tarmo Virki, Additional reporting by David Lawsky in San Francisco and Eric Auchard in Santa Clara; editing by John Stonestreet)
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