RINGTONES BECOME FIRST DOWHLOADABLE MUSIC SUCCESS STORY.
Source: Music Week

As paid-for internet music services stumble, companies offering mobile phone ringtones are booming. Toby Lewis investigates the implications for the music industry of a growing phenomenon.

Still considered by many to be annoying and worthy of ridicule, mobile phone ringtones have begun to acquire a strange kind of prestige in recent months. While some much-trumpeted paid-for web music services continue to stumble, phone tones have stolen their thunder, capturing the public's imagination and becoming the first music downloads to add real value to copyrights.

While recorded product languishes in a digital rights deadlock, the comparatively straightforward ringtones sector has, since March 2000, had its own legitimate rights structure, administered by the MCPS.

Anyone who has travelled on public transport since then will attest to the fact that, as far as ringtone suppliers are concerned, business is good. And those who have been left with half the Top 40 rattling around their brain after a 20-minute train ride can be reassured that they have evidently only been exposed to the top end of the market, as retailers themselves are vehement that there is a huge difference between a good and a bad ringtone.

"You should be able to recognise it as the melody of the tune," says musician Antony Westgate, who through his firm Westgate Productions provides tones for SomethingGR8.com. "If you can't, it doesn't work and should not be used."

But as pop mogul Pete Waterman complained on a recent investigation of tone sharks by BBC documentary Hard Cash: "Some of them are rip-offs. Some of them are blatantly nothing like the tune."

Gary Van Til of Mobiletones.com, which distributes tones and phone logos for the Ministry Of Sound as well as several big football clubs, explains that the substandard versions offered by some of his competitors are a product of both inadequate tone programmers and financial corner-cutting. "Ringtone companies must pay to send the SMS message containing the tune to each user," says Van Til. "The odds are that a simple tone will cost one SMS to deliver, but a more complex piece of work will require two."

It is a matter of taste as to which segment of the song is the most obvious hook, leading the more conscientious dealers to provide the intro, verse and chorus of some songs to avoid customer dissatisfaction. "For Smells Like Teen Spirit by Nirvana we have four different versions," says Van Til.

Prices vary tremendously, from the equivalent of 80p per tone up to as much as 5 [pounds sterling] or 6 [pounds sterling] for those customers unlucky enough to get lost in the navigation menu of a 1.50 [pounds sterling]-a-minute premium rate phone line.

There are still some firms which attempt to provide products for free -- notably YourMobile.com, which originally planned to subsidise services via advertising and data mining -- but the cost of sending tones tends to preclude the practice of giving away music in the time-honoured internet fashion.

Even before web hosting, site design, bandwidth or publishing licences are considered, there is a charge paid by retailers to mobile networks of between 5p and 7p for each SMS message sent. As Simon Wheeler of Beggars Banquet explains: "We are doing an Ed Case promotion with iobox, and I originally wanted to give the tones away for free, but iobox's business is in selling them. They would have required us to pay five-figure fees plus charges to give them away, which was outside our budget."

Many insiders argue that the high price of ringtones is restricting the business. "A lot of companies say people don't care about the price but that's rubbish," says Andy Mills, director of Ringtones.co.uk, which manages a branded service for NME.com, among others. "We halved the price of our ringtones recently and sales went up by 400% overnight."

Contrary to some recent coverage, reports of ringtones being "the next Napster" seem to be unfounded. While there is a piracy concern, the main problem lies not with consumers avoiding paying but with sites stealing ringtones programmed by their own competitors.

"I'm pretty sure that I've found other companies selling ringtones that I've created," says Ringtone.net's Andy Clarke, who was directly responsible for the success of the Mission Impossible tone -- the first tone he ever made available.

On a darker note, though, the recent rash of advertising for ringtone firms in the tabloids is evidence that a more shadowy side of the British economy is jumping aboard the ringtones bandwagon -- often without the required licences.

"It's clearly big business," says Jim Doyle, a music publishing consultant with Responsive Music Services. "Companies are taking out 50,000 [pounds sterling] ads in the News Of The World and many of them are just moving from the sex-line industry into the ringtones industry. If there was money in origami, these people would set up a line to cash in on it."

Some observers suggest, however, that not even the bigger tones firms are all quite as squeaky-clean as they might like to appear. One area in which artists are arguably losing potential revenue is that of operator Iogos and picture messages. Many firms offer fans the opportunity to buy an electronic graphic for their handset representing their favourite act for around the same price as a ringtone. Common favourites include the names and logos of Eminem, Dr Dre, Coldplay, Limp Bizkit and 'NSync. But as there is no blanket licence available for the copyright in logos, it is up to an individual seller to negotiate the rights -- or not, as the case may be.

"What we do is write to every artist's press officer, and say, `we have made a logo of yours, please let us know if you want us to take it down'," says Susanne Sidwell, Smart Messaging product manager at iTouch.co.uk.

According to Sidwell, only a tiny fraction ever expresses an objection, although whether this is a sign of tacit approval or plain ignorance is hard to gauge. James Winsoar, whose site Tonez.co.uk sells logos taken from big name artists, firmly believes the former to be the case. "The vast majority of artists are quite rightly delighted that their logos will be offered as it will serve to promote their band and effectively give them free advertising," he says.

But the music industry is not famous for allowing interlopers to profit from its assets in the name of promotion, and there are those who believe that artists need to educate themselves while the mobile content market is still in the early stages of development.

"Mobile is going to be so important for the music industry, and ringtones are just the tip of the iceberg," says Michael Ohajura, sales and marketing director at SMS distribution specialist Materna Communications. "Bands are going to start having to assert the rights to their name and image in this space, because when 3G arrives, there is a danger they could be ripped off."

Because there is at present no recorded audio playback involved in a ringtone, the permissions required to sell one are based solely around a publisher's copyright in the song. The MCPS provides a licence on behalf of its 19,000 member publishers, meaning that any company wanting to provide ringtones in the UK can do so legally through an MCPS mandate.

As with the wider debate over music downloading and mechanical fees, there are some who feel that the minimum 10p per download rate could be somewhat limiting. "I think the MCPS charge might be too high," says Responsive Music's Jim Doyle. "If the rate for a record is 8.5% of dealer price, and we equate that to retail price, then in fact we have a royalty which is almost double its equivalent."

Julia Montero, Online Agreements Manager at the MCPS, emphasises that it is a new market and therefore the licence fee is constantly under scrutiny. "The present fee is what our members feel their copyright is worth," she says. Music publishing expert Jonathan Simon of Moncur Street Music expresses his personal opinion on the subject more forcefully: "Without the intellectual property in question -- for which a royalty should be paid -- there would be no product to distribute."

MCPS has so far managed to maintain quite a strong front with publishers -- and especially ringtone retailers, many of ad whom like to boast the MCPS seal of approval as a selling point. To date, only one major publisher has chosen to pursue a directly-negotiated deal with a ringtones supplier: EMI Music Publishing, which infamously forged its own agreement with Nokia.

EMI director of film, television and media Jonathon Channon, is keen to play down the significance of the move, noting that negotiations began well before the ringtone craze started and should not be perceived as a slight on the MCPS's subsequent efforts. "It's become very folkloric, but in reality all we did was to pick up the phone to a major industry," he says. "To try to find a legitimate use of our music in an environment with quite a lot of rogue operators seemed to be a smart move, both politically and financially."

Where a problem did arise, Channon adds, is when Nokia wanted a different type of material from the classic back catalogue material that EMI had originally been providing. And it is when dealing with chart hits -- for which songwriting rights can often be split between different publishers, sometimes in different territories -- that the advantages to ringtone sellers and publishers of the MCPS-style licence truly become apparent.

In addition to the MCPS mandate, all sellers must acquire a licence from the Performing Rights Society (PRS), charges for which amount to 5% of revenue from downloads, ostensibly to cover the transmission of the music embodied as a ringtone from server to mobile phone. This licence is paid far more grudgingly by ringtones distributors, many of whom complain they should not pay a performance fee if it can be proved that customers have not heard a sample of the ringtone before purchase.

"There are certainly questions to be dealt with," says Van Til of Mobiletones.com. "I think we're paying a lot more in PRS per sale than a site selling CDs."

Mike Palmer, PRS broadcast sales manager, is having none of it: "We're simply licensing the fact you're presenting music for the public. We don't even care whether the ringtone is downloaded or not -- we don't take the risk of your business."

Is this level of controversy justified over something as trivial as a ringtone? "I think it is to some extent a fad," says Derek Bell of Mobileringtones.com. "At some point, we're going to reach saturation."

But Clare Melford, strategic development executive at MTV Networks Europe, which is launching its own tone-selling scheme, points out that ringtones 2001-style represent a mere stepping-stone to a wireless music future.

"Ringtones as they exist today will not last longer than 12 to 18 months. However, they provide two very important functions: first, they get people used to buying products through their mobile phone; and second they will be the prelude to more impressive songs that [third generation phones] will be able to play as ringtones. A corollary benefit from MTV's point of view is that they associate the mobile phone with music and the purchase of music in the consumer's mind."

Indeed, Universal Music Special Projects has already signed a contract with French technology company Digiplug, a member of the Mobile Entertainment Forum, to sell "customised ringer music recordings" with audio samples taken from the albums of Universal artists including The Cranberries, Sting and Stevie Wonder. And while Telstar Records, together with DX3 and iobox, recently trumpeted their launch of "the world's first real music ringtone" featuring the full chorus of BBMak's Top 10 single Still On Your Side, such high-bandwidth activities are a long way from common reality.

Currently, says Carlos Rodrigues, head of new media at Telstar, there is only one Nokia handset capable of playing audio samples and it is impossible to receive the ringtone directly to the phone. "As the Nokia 9210 is also a Personal Digital Assistant (PDA) you basically download the ringtone to your PC and then sync it with your PDA."

The immediate challenge that the music and ringtones industries now face is to enable music fans, particularly youngsters, to access ringtones of their favourite songs without simultaneously introducing them to the controversial world of premium-rate calls.

It is a dilemma that James Buckland, head of business development at GR8, believes he may have solved, charging customers via scratchcards which can be bought at newsagents and supermarkets across the country.

"We offer a simple, low-cost, fun item at 99p for one credit which buys one ringtone or one logo," he says. "We can still afford to produce and distribute the card while turning a profit -- and it will be a godsend for parents."

In the meantime, credible figures on the size of the UK ringtones industry as a whole are near impossible to come by, with no small amount of sniping and one-upmanship between the highly-competitive tone retailers. Sidwell says iTouch is selling 30,000 ringtones a week at around 3 [pounds sterling] each. Derek Bell at Mobileringtones.com is less bullish. "If we sell 10,000 ringtones in a week, we have a good week," he says.

Most estimates, however, paint a picture of a market worth between 5m [pounds sterling] and 30m [pounds sterling] in total for this year and, judging by the 80 new applications for an MCPS licence in April alone, the sector is still expanding.

So regardless of how irritating or irrelevant ringtones might appear, they are already bringing funds into music business coffers, unlike many other areas of the new media. And publishers have been right to grab the bull by the horns early on. As EMI's Jonathon Channon confirms, "We see it as a very serious area to generate revenue."

The ringing ... of cash tills

With ,prices coming in at up to 4 [pounds sterling], it is easy to view ringtones as a license to print money. But a breakdown of the costs and the revenue distribution reveals that margins are slimmer than they might initially appear.

From each tone sold, the MCPS receives from 10p to 10%, whichever figure is higher. In addition to this is the PRS' 5% cut, which reliably provokes irritation among retailers. On top of this, if the ringtone is sold through a partner site, there will generally be a distribution fee payable to the affiliate, equal to between 30% and 50% of the net price.

From a manufacturing and supply point of view, a fee of 5 [pounds sterling] to 10 [pounds sterling] goes to the programmer who creates the tone itself -- clearly amounting to a negligible outlay if the tone proves popular. Then there is the SMS delivery cost of between 5p and 7p, which stands to double for the more complex ringtones which require two text messages to deliver.

When bandwidth, hosting, web design, on- and offline advertising and premium line rental are all taken into account, it becomes clear that ringtones re-sellers have more in common with their overhead-laden dotcom predecessors than we might once have imagined.