Ringtone Rumble Brewing

The U.S. ringtone pie is still baking, and already battle lines are being drawn over how to divide it.

Among the parties reaching out for their share are wireless carriers, content aggregators, billing agents and repertoire owners, including labels, artists, publishers and songwriters.

"Everybody's position is that they have incremental costs or investments that they have to cover with the revenue," says Carolyn Schloeder, president of Faith West, the San Francisco-based aggregator that operates the Modtones service.

It is clear that the ringtone business is just getting going in the United States. Only 5% of U.S. cell phone users have downloaded a ringtone—whether it's a plinky 99 cent monophonic jingle or a $2.50-$3 master clip.

This compares with about 70% for Japanese cell phone users.

As Americans upgrade to next- generation phones with greater content-serving capacity, analysts predict the ringtones business will soar.

Worldwide ringtone sales of all kinds totaled $3.5 billion in 2003, according to The Economist. In the United States, it's about a $200 million industry, according to Fabrice Grinda, CEO of content aggregator Zingy.

But Boston-based market research firm the Yankee Group predicts that U.S. business will grow to $1 billion by 2008.

Last July, master ringtones demonstrated their sales potential when Sprint PCS users flocked to the downloadable Beyoncé clips "Baby Boy" and "Crazy in Love" for $2.50 a pop. By January, the clips had sold 500,000 units, generating $1.25 million in revenue, according to New York-based market research firm Consect.

Slicing up this new chunk of revenue was easier when it involved only monophonic and polyphonic tones that were generally studio reproductions of memorable songs. On the repertoire side, these required only the payment of mechanical and performance royalties to publishing-rights holders.

However, the more expensive master ringtones—which are 30-second samples of original works—also require licensing from the owners of the master recordings.

NO STANDARD YET

No consistent model has yet emerged for dividing the proceeds of a master ringtone sale, and as technology changes, the deals are changing. But various deals have followed standards established by polyphonic ringtones and such online music stores as Apple's iTunes.

To begin with, the major wireless carriers—Sprint, Verizon, Cingular, T-Mobile and AT&T—handle billing and collection. They keep 10% to 40% of the gross revenue. Some industry sources peg the number at about 20%.

The carrier's share partially depends on whether it hosts and serves the ringtones and whether it does its own billing verification (matching cell phones to existing accounts). Generally, a third party, such as Qualcomm or QPass, handles the verification process. These agents get 10% to 16% of retail for their efforts.

Next are the aggregators, who bridge the gap between wireless carriers and the repertoire owners. The "big three" players in the U.S. market are Zingy, Faith West and Moviso.

For polyphonic ringtones, aggregators earn 35%to 65% of retail. From this, they typically pay the publishing share.

When dealing in master ringtones, however, the aggregators can get squeezed, typically down to 15% to 20%, but sometimes the cut can drop all the way down to zero.

That's because major labels, which see master ringtones as an important new revenue source, are asking for about 50% of retail in most cases. The label share includes the artist's cut, and in some cases, the publishing share, industry sources say.

Although the aggregators get a smaller share of the revenue when it comes to master ringtones, they recognize that the overall pot is getting bigger.

"The margins will go down, but the price points are increasing, so the dollar profit usually remains the same," Zingy's Grinda says.

That's if the aggregator stays in the deal at all. In some cases, major labels are able to directly license their repertoire to a carrier, bypassing the aggregator.

Sony Music in particular has internalized much of the mobile development and distribution process through its Run Tones solution. Sony has direct deals with some of the carriers but also licenses content to the aggregators.

THE PUBLISHING PIECE

Whatever type of ringtone is involved, the use and sale of the music triggers mechanical and performing-rights fees.

The performing-rights organizations have different rates for ringtone use. BMI collects 2.5% of gross; ASCAP collects 2%. SESAC fees vary depending on the number of ringtones sold.

"We feel that every application we're licensing is a performance, and our customers have signed on and are paying as such," says Richard Conlon, VP of marketing and business development with BMI.

"We're licensing the performance rights both in download and Web site previews, as well as the performance rights in the streaming product," Conlon says. "We did do a broad grant to keep it easy and remove a layer of complexities."

On the mechanical side, some publishers have made direct deals for ringtones and are collecting a minimum of 10 cents or 10% of gross per track, whichever is higher. This exceeds the statutory mechanical rate of 8.5 cents.

When a direct deal is not in place, the Harry Fox Agency handles the mechanical licensing. HFA collects 10 to 12 cents per download, plus an initial "fixation" fee of up to $50 to include the composition in a ringtone service.

Some in the wireless business are critical of the rates being established for music use. Ralph Simon, chairman of the Mobile Entertainment Forum, says the music industry is asking for too much, too soon.

"In the early stages of the development of this new medium, participating parties shouldn't be too greedy," Simon says. "People are too proprietary about these new initiatives; it needs a cooperation to grow this new revenue channel to everybody's benefit."

Faith West's Schloeder thinks the master ringtone model will gravitate toward a 40/40/20 split for the carriers, repertoire owners and aggregators, respectively.

Grinda says the "big three" aggregators will weather the master ringtone storm because they have developed such other classes of mobile content as wallpaper, voice ringers and voicemail greetings. Revenue models for these new music uses are still developing.