Nokia is to buy Loudeye, the US digital music company that owns On-Demand Distribution (OD2), the European music download supplier started by Peter Gabriel. The Finnish mobile phone giant is paying $60m in cash for the company.

Nokia described the deal as the foundation for its own music service with which it will target owners of its phones, in particular is N-series handsets.

It said the music service will go live next year and target Nokia handsets the way Apple's iTunes Music Store targets iPods. You can tell that's the model Nokia has in mind: it specifically described itself "the world's largest manufacture of digital music players".

Loudeye characterised the deal as an indication of its standing in the digital music world, but we'd say it's a sign of the value of its content distribution licences. Nokia's essentially buying those to avoid having to negotiate directly with the music labels, particularly those who, having had to deal with the explosively successful Apple isn't keen on facing another big-brand vendor who's prime interest is hardware sales.

Loudeye acquired OD2 in June 2004, paying $40.5m in cash and shares for the company. By that point, OD2 had signed deals with a stack of European ISPs, PC makers, music retailers and others to supply, host and maintain digital music stores. Loudeye bought OD2 to bring an international focus to its them US-only offering. Ironically, OD2 proved the more successful of the two and earlier this year, Loudeye sold its US operation to local rival Muze. As a result, Loudye is OD2.

OD2's problem is that it's dependent on its brand partners to market its services. Many of them, like Coca Cola, Oxfam, Tiscali, MSN, and Packard Bell, are not music-related companies. As such, the company has struggled to carve out a significant chunk of the market in the face of new, digital music-specific brands like Apple, Napster and Wippit. MSN had six per cent of the UK market in April 2006, according to market watcher XTN Research, compared to Apple's 44 per cent.

OD2 recently lost Coca Cola, which shut down its MyCoke music service, apparently in favour of a deal with Apple. OD2 has also lost music retailers HMV and Virgin during the past two years.

How the company's relationships with its current partners will be maintained once Nokia takes over - the deal should be completed in Q4, the phone company said, remains to be seen. Nokia's interest in driving demand for its phones may see it shift the acquired firm's focus away from the Windows Media-based services to the Nokia phone-friendly one. In any case, OD2's partners may not like their idea of working with a supplier who also competes with them directly. ®