Cashing In on Ring Tones
By BOB TEDESCHI

TURNS out, teenagers are happy to pay for digital music - as long as they are forced to listen to cheap facsimiles of songs on speakers the size of a dime.

O.K., maybe that is a bit unfair. But there is no denying that ring tones, those synthesized melodies like 50 Cent's "In Da Club" that are programmed to play when a cellphone rings, are fast becoming a big business for record labels and mobile phone services. Last year, cellphone users worldwide, most of them young people, spent $2.5 billion to $3.5 billion on custom ring tones. Total music industry sales worldwide for 2002, the last year for which figures are available, were $32 billion, according to the IFPI, a trade group.
The American ring tone market is a couple of years behind Europe and Japan's, and is just beginning to take off, with an estimated $80 million to $100 million sold over the wireless Web last year. Cellphone users in the United States are expected to spend $140 million to $200 million this year.

For record labels, this bonanza is good news from what has been the music industry's bugaboo, the Internet, where peer-to-peer services like Kazaa and Grokster have sprung up to allow the industry's most avid customers to download, free, to a personal computer just about any song they want.

But the hopes of record companies for extra riches from selling ring tones could be tempered by the emergence of other Web-based businesses like Xingtone, which has started selling a $15 software kit that allows consumers to turn digital music files, whether acquired legitimately or illegitimately, into better-sounding "ring tunes" - cutting the labels and wireless carriers out of the deal.

Until now, there has been no effective way to cut a clip from a song available digitally as an MP3 file and put it on a cellphone.

Xingtone's software gets around that obstacle. The president of Xingtone, Brad Zutaut, says that more than 40,000 people have downloaded the software, most of them in the last two months when the company was giving it away to build awareness.

Mr. Zutaut said that music labels and cellphone companies could reasonably view Xingtone as a threat, but he contended that they should look at him as a potential business partner.

"For the wireless carriers, we give people something to do with their phones," Mr. Zutaut said. He encouraged other music labels to follow the lead of Walt Disney's Hollywood records, which last month agreed to allow Xingtone to distribute free promotional audio clips of its artists, including Hilary Duff and Josh Kelley.

The recent emergence of the custom ring tone business in the United States has primarily been driven, experts said, by three factors.

First, handset makers like Nokia, Motorola and others have introduced sophisticated devices capable of playing video and audio files. Second, wireless carriers like Sprint, Verizon and AT&T have developed systems to let a user easily select and download a ring tone, and charge it to a wireless account.

And third, record labels, noticing how quickly licensing fees are growing elsewhere, have intensified efforts to license their most popular songs for ring tone distribution.

"This is a hit-driven business,'' Sony Music Entertainment's chief technology officer, Philip R. Wiser, said. "What they're hearing on the radio is what they want on the phone. So we've got John Mayer, Beyoncé; we had B2K. Our hot R.& B. urban acts are all up there."

Getting the songs to consumers is easy. Advanced cellphones have screens that can display a list of hundreds of songs, available at fees of $1.50 to $2.50 a song. A selected 30-second song clip is downloaded to the phone, where it can be stored or chosen as the ring tone of the moment.

Depending on their cellular provider, consumers may also browse through tunes and audio novelties on traditional Web sites like MTV.com, PlanetRingtone.net and others. Purchased audio files are sent over the Web to the cellphone for downloading.

For now, executives said the biggest market for ring tones is teenagers, for whom simply owning a cellphone is no longer distinctive enough.

"If we could've paid two dollars to be perceived as cool in high school, we probably would've, too," said Fabrice Grinda, chief executive of Zingy, a company that sells ring tones on its Web site and provides e-commerce services for mobile phone carriers and others.

But analysts said they expected older adults who want to announce their affection for, say, Bruce Springsteen or Celine Dion, to become major buyers as well. By 2008, cellphone music purchases in the United States could reach $1 billion, according to the Yankee Group research firm.

Crucial to that growth is the continued proliferation of high-tech phones. Seamus McAteer, an analyst with the Zelos Group, a San Francisco research firm, said that phones in the United States capable of using ring tones should grow from roughly half of the 155 million handsets in use today to 75 percent by year's end. "Dollars will follow," he said.

By then, more wireless users will be listening to 50 Cent's actual audio clips - words and all - rather than the synthesized versions. The newest generation of cellphones offered in the United States can play multichannel audio files with sound quality far better than that of ring tones, if not quite as good as music from CD's or MP3 players. These files, variously called ring tunes, music tones, song tunes, TruTones and master tones, are expected to spawn even greater demand.

"This is quite an attractive market to us," said John Rose, executive vice president of the EMI Group, the London-based record label. "We think it'll be a significant multibillion-dollar market over the next couple of years as the new handsets roll out."

For music labels, ring tunes may prove significantly more profitable than ring tones, which generally generate publishing royalties of roughly 15 percent. With ring tunes, licensees also pay master recording royalties of 30 to 50 percent, industry executives said.

That is where Xingtone could make a big difference. On one hand, by making it easy to create one's own ring tunes, it could force cellphone companies and record labels to sell their own tunes at lower prices. On the other, it could also serve as a vehicle to encourage wider sales of music in various forms.

Mr. Zutaut pointed to the approach of Sugarcult, a pop band that will include a limited version of Xingtone's software on its new CD's, allowing users to make their own ring tunes. To make ring tunes with other music, users would buy Xingtone's full software program, and Sugarcult would split the revenue.

"It's an incredible promotion vehicle," Mr. Zutaut said.

Mr. Zutaut also contends that the practice is legal because it represents a fair use of music that consumers already own. Industry executives, and representatives of the Recording Industry Association of America, declined to comment on Xingtone's legality.

Many in the industry are watching Xingtone, as well as emerging hardware technologies that could allow people to share ring tones between phones, because they could damage the market.

"The threats to this business,'' a Yankee Group analyst, Adam Zawel, said, "will only increase over time."