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The media has dedicated more than its fair share of column inches to the burgeoning ringtone market over the past 12 months. 2003 was the year that ringtones moved out of the playground and hit the headlines, shocking the music industry into sitting up and taking notice. Reports of ringtone sales outstripping CD single sales were not lost on the record labels who earn royalties only on the use of their master recordings and not on the synthesised ringtones causing so much attention. While operators grew fat on a seemingly ever-growing ringtone revenue stream, record labels looked at ways to avoid a repeat performance of the problems that dogged the internet file-swapping market of the last few years.
The defensive stance taken by many in the music industry towards the loss of revenue is somewhat understandable. Lessons have undoubtedly been learnt from the rise in file sharing across the Internet. Heavy-handed tactics to remove players such as Napster and randomly prosecuting those illegally downloading tracks only touched the tip of the iceberg and left the industry on the back foot, slowly realising that it had cannibalised a potentially lucrative market. The same mistake will not be made again. The music industry may have had trouble convincing consumers to pay for content online but the mobile channel is another matter.
The music industry had become accustomed to selling CDs. New media channels such as the internet broke the accustomed retail model. Early claims that that the industry could be losing $1million a day through unlicensed ringtone operators has widely been accepted to be an urban myth, although most agree that the real figure is still significant for an industry that suffered a 10 per cent drop in world music sales during the first half of 2003.
It is not surprising then that record companies have been keen to move the ringtone and mobile music market away from the synthesised tones which provide only the songwriter with a licensing fee and into the provision of original master recordings. The first example of this has been truetones. An advancement on polyphonic ringtones, truetones use actual 20 to 30 second sound clips that often, although not always, originate from the master recording.
Downloads to mobile
Of course ringtones only demonstrate the potential of the mobile network. Many tip music download services as the 'next big thing', allowing consumers to purchase full tracks and download them to their handset for playback. 02 in the UK became the first European operator to launch such a service, providing a digital music player to connect to the handset and allowing over the air downloads and the ability to transfer tracks to a PC.
As with camera phones, it won't be long until such functionality becomes commonplace to new handsets. Despite attracting praise for its innovation, the company's pricing model demonstrates the problems that may lie ahead. Downloading a song from 02 currently costs £1.50 (£1.00 for non-premium tracks). This is less than the £2.50 it charges for polyphonic ringtones and £3.50 for truetones. The most valuable of the product range, the full and original music track, is thus being sold at a fraction of the cost of a 20 to 30 second clip often sung by a 'sound-a-like' to avoid payment to the record label for use of the master recording.
A closer look at the pricing models reveals these music downloads are currently being sold with noticeably smaller profit margins to combat the continuing trend of free file swapping internet services. In the UK, ringtones are subject to licence fee of 15 per cent, leaving a comfortable profit margin on products that are relatively inexpensive to produce and deliver across the network.
Truetones, of course, command higher costs, including the cost of paying rights to the owner of the original sound recording. In many cases, such costs make the pricing model unworkable, resulting in operators such as 02 using cover artists and imitators. At the other end of the spectrum, music downloads attract the highest copyright, hosting and network delivery costs downloads can consume approximately 1MB of data leaving little room for profit. In its position as a 'market first', 02 has been backed into a corner, effectively missing early revenue potential in order to grow a market for the rest of the industry. However, such costing is necessary to compete both with free file-swapping and the lower cost internet downloads available through services such as MSN and Real Networks.
Striking a balance
Logically, in this scenario it is the music industry that is benefiting and taking the lion's share of the revenue. Like many internet players, mobile operators and content providers are desperately looking to strike a balance between fair licence agreements and end-user costs. Famously, Apple CEO Steve Jobs admitted that despite controlling a significant share of the online music download market, the company makes no money from music content. Instead it relies on hardware such as the iPOD. With little, or no hardware to sell, the operators are quite rightly becoming defensive over a market they have controlled through the growth of ringtones.
Other operators will soon face the same pricing issues as 02. T-Mobile has already signed a deal with Universal Music. The agreement has paved the way for the launch of caller tones or ringback tones, a service that enables users to replace the traditional call connection tone heard by callers to their phone with music selections (see page 42 for more on ringback tones). Caller tones have already seen significant success in Asia. In Korea, more than a third of all mobile users had subscribed to a caller tone service within 18 months creating a multi-million dollar market almost overnight.
Unlike 'vanilla' music downloads, operators have been able to leverage additional revenue streams from caller tones, forgoing the licence demands of the music industry and commanding a monthly 'subscription' to the service in addition to the actual cost of purchasing a tone.
There are undoubtedly challenges facing all parties, most notably with regards to pricing models and revenue shares. At the other end of the spectrum there are a handful of publishers and artists still unhappy with the mobile music market. Those that turn their backs on the whole issue of mobile digital content are turning their backs on a potentially huge revenue stream and leaving the field open for the continual rise in unauthorised, poor quality products.
Ultimately, the music industry must step up and proactively take a role in cooperating not only with content providers but mobile operators. If these players embrace the mobile market and work with content providers to develop products then all will benefit from authorised, DRM protected content. Most recently, the Mobile Entertainment Forum and KPMG announced plans to launch a UK Ringtones Top 20 chart to provide accurate statistics. How long will it be before the official music charts are based not on CD single sales but mobile downloads? Author: David Warburton is the CEO of The Music Solution (TMS)
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