WSJ -- Ringtones Based on Songs Fall Short of Expectations.
September 13, 2004
Missing You
Music Industry Struggles To Get Cellphone's Number
Ringtones Based on Songs Fall Short of Expectations; Battle for Piece of Action
'Yeah!' Arrives, Months Late
By ETHAN SMITH
Staff Reporter of THE WALL STREET JOURNAL
Music companies, hungry for new sources of income, thought they'd hit the jackpot remaking hit songs as cellphone ringtones. For example, a recent hit from hip-hop star Usher called "Yeah!" with its distinctive keyboard riff, would have made an "incredible" ringtone, says Michael Gallelli, director of content services at cellphone carrier T-Mobile USA Inc.
But for months, the publisher representing one of the song's seven co-authors balked, Mr. Gallelli says. Not until mid-August, long after it had disappeared from the charts, did that company relent and "Yeah!," quickly started selling as many as 40,000 copies a week, making it a top-selling ringtone. The delay had cost all concerned hundreds of thousands of dollars in lost revenue.
That snafu shows how new technology is once again snarling up the music business. The ringtone market, once seen as the industry's next cash cow, has become a dizzying free-for-all, stymied by nightmarish contractual disputes, conflicting technical requirements and the old specter of piracy. Losing out could be a big blow to an industry that most recently missed the opportunity to control the sale of music online.
Musicians have contracts with companies that own the underlying music and lyrics and also with companies who own the rights to a recorded performance. Sometimes many musicians are credited with writing one song. Getting all these players to agree on ringtone rights can be a huge morass. Meanwhile, not all cellphones play all ringtones. No one can even agree on what to call the latest variants that play actual snippets of songs, as opposed to tinny beeps. They've been dubbed master-tape ringtones, ring tunes, true tones, hi-fi ringers and song tones.
"I wish someone would come up with a name for them," says Larry Kenswil, president of eLabs, the unit of Vivendi Universal SA's Universal Music Group responsible for digital music.
The music industry hopes, as an act of self-expression, that consumers will fork over a dollar or two to personalize the sound of their cellphone ring with lo-fi renditions of hit songs. Typically, consumers buy ringtones from menus built into their cellphones; their cellphone provider then beams the tune to their phone. There are also third-party sellers, such as Web sites, which send the tune to consumers' phones in the form of a message.
It's possible the music industry has already missed the call. Some executives believe the business may be short-lived once cellphones meld with digital-music players and become sophisticated enough to store large amounts of original music. The ringtone market will "be a big business for the next few years and then it's going to go away," says veteran music attorney Jay L. Cooper, who represents artists such as Sheryl Crow and some ringtone companies. But, he adds, if companies don't take advantage "while you have this window of opportunity, you're losing millions of dollars a day."
Ringtones emerged as a viable business in the U.S. in 2002 after a couple of years of experimentation. The ringtone version of "In Da Club" -- one of the biggest hits of 2003, by rapper 50 Cent -- handily beat digital sales of the song, says Universal Music, which publishes and distributes 50 Cent's music. That's despite the fact that the ringtone was only 30 seconds long, contained no vocals and cost twice the 99-cent price of buying the song from Apple Computer Inc.'s iTunes digital-music store.
Trying to get into the market, Sony Corp. in 2002 acquired New York-based Run Tones Inc., a small company specializing in entertainment for cellphones. Warner Music Group also announced plans to sell ringtones on its Web site. As interest heats up, the trade magazine Billboard, in conjunction with Consect LLC, a consulting company, plans to soon launch a chart tracking ringtone sales.
Estimates from several consulting companies put world-wide sales at $3 billion or more in 2003 -- roughly 10% of the value of the global music market. In South Korea that year, sales of ringtones were more than double those of CDs, says Ralph Simon, chairman of the Mobile Entertainment Forum for the Americas, a trade group.
In the music industry, new technologies have often clashed with existing law and business practices. In the early 20th century, Congress worried that music publishers wouldn't share works in their catalogs with the new player-piano industry, so it created a law forcing them to do so and mandated a two-cent per-roll royalty as compensation.
As the rise of radio threatened to undermine record sales, organizations that collected performance royalties on behalf of songwriters -- such as Broadcast Music Inc. and the American Society of Composers, Authors & Publishers -- started collecting fees from radio stations, too. In 1992, the recording industry persuaded Congress to impose a tax on digital-audiotape recorders and tapes. That technology was a dud with consumers.
But in a costly omission, computers and CD burners, now the most popular way to create flawless digital reproductions, weren't covered by that law. That was "a gigantic OOPS," wrote attorney Donald S. Passman in his authoritative book "All You Need to Know About the Music Business." As a result, millions of consumers make digital copies of music every day on equipment that generates no revenue for the music industry.
Having lost control of how consumers listen to digital music, the industry saw ringtones as an opportunity to avoid these mistakes and earn money from a technological advance.
Fundamental Problems
But, as the industry quickly found, there are fundamental problems bedeviling the market. To begin with, its size is hard to pin down. An analysis by Sanford C. Bernstein & Co., the research arm of Alliance Capital Management LP, argues that the world-wide market is closer to $2.2 billion rather than the $3 billion figure usually cited. Another problem: Americans have been less eager than Europeans or Asians to adopt other cellphone accessories such as text messaging.
According to BMI, the royalty-collection group, the U.S. market in 2003 totaled between $66 million and $68 million -- less than the $100 million or more that many in the ringtone industry have touted. Based on the first six months of 2004, BMI estimates that sales for the year will reach $240 million.
The proliferation of different players, including those from outside the music industry, has complicated matters. In late 2003, Infospace Inc., an online search company, spent $25 million buying Moviso LLC, one of the largest companies that had set up shop as a middleman between music companies and cellphone operators. This year, For-side.com Co., a Japanese mobile company, bought two of Moviso's smaller competitors.
Consumers, as a result, have multiple choices of places to buy ringtones, including cellphone operators, specialty Web sites, and the Internet homes of big name music stars. Rarely are the offerings compatible with all types of phones.
Madonna recently began selling ringtones of big hits including "Into the Groove" and "Lucky Star" in a deal with m-Qube Inc., a company that uses professional musicians to compose ringer versions. But consumers must own specific cellphones. Sprint Corp. customers can download Madonna's ringtones but only to three phones made by Samsung Electronics Co. Verizon Communications Inc.'s wireless customers, on the other hand, can download ringtones to only phones made by LG Electronics Inc. or Motorola Inc. Only eight songs are available in total.
Ringtones "can always get better," acknowledges m-Qube Chief Executive Jeffrey Glass. He says the business is making progress. "You can do things that you could never do two years ago," he says.
Many Collaborators
Turning a song into a ringtone requires the consent of all parties and in the case of rap music -- a popular source of ringtones -- there are often many collaborators. "Where there are multiple songwriters or people who own the rights, it's hard to reach them," says Carolynne Schloeder, president of Faith West Inc., the U.S. subsidiary of the Japanese ringtone firm Faith Inc. "Sometimes people won't call us back."
People involved with developing the hit Usher song as a ringtone say one company, which had only a partial interest in the song, was responsible for holding up the process. Jonathan Smith, a successful rapper and producer who goes by the name Lil Jon, was one of seven people credited on "Yeah." As a song writer, Mr. Smith is represented by the music-publishing arm of TVT Music Inc., based in New York, a company that was suspicious about the legitimacy of many ringtone operators.
After a six-month delay, TVT eventually struck a deal in August with Infospace Mobile and other ringtone companies. "Our clout as a hit maker has given us leverage to strike the deals we feel are appropriate," says TVT President Steve Gottlieb, adding that the company is working "aggressively" to get the best deals for its artists and songwriters.
In many overseas markets, the licensing process is less fragmented. Music publishers belong to powerful industry associations that have been assiduous in making deals with cellphone companies that cover all their members.
Just as digital music sellers face competition from online file sharing, the ringtone business is beset by grey-market operators who can roll out cheap versions of hits often without first obtaining licenses. Chris Lee, a 23-year-old senior at University of Michigan, pays an annual $9.99 fee for unlimited downloads from a Web company that hasn't struck deals with music publishers. In the past seven months he has downloaded ring tunes by DMX, 50 Cent and Jay-Z, among others. Mr. Lee says the prices charged by his carrier, Sprint, of between 99 cents and $1.99, are too high.
Mr. Lee says he wants to experiment with multiple ringtones to find versions that sound like the real thing. "People around me have to hear it over and over, and if they can't tell what it is, it's annoying," he says.
As complicated as the ringtone dance has been so far, it's going to get worse as music companies and cellphone carriers look ahead to the next generation of ringers, which use clips of actual songs rather than chirpy remakes.
Selling for as much as $2.99, these songs can be played on only 20% of most carriers' new handsets, although the rapid turnover in cellphone technology will likely improve this situation. Sales so far have been unpredictable. Some ringtone sellers say these "master tones" account for as little as 1% of their overall business. Others say it runs as high as 15%.
More problematically, two powerful groups in the music industry have been at war over who should get the profits. Royalties from standard ringtones, which are new renditions, typically go to music publishers, the entities who own the rights to a song's music and lyrics.
Standard ringtones typically earn publishers either 10% of the sale price or 10 cents, whichever is higher. Selling master ringtones at almost $3 a piece would earn them nearly 30 cents per sale. Some publishers, arguing that they built the ringtone business from scratch, have pushed for royalties as high as 50%.
But recording companies, which own the rights to specific recorded performances, want a bigger piece of sales of ringtones that use actual song clips, on the grounds that they own the rights to those recordings. They argue that ringtone sales should be treated the same as sales of CDs or digital downloads because it's the same version of the song, just in a different format. That kind of sale, which is regulated by Congress, would pay music publishers only 8.5 cents, leaving more on the table for recording companies and artists.
So far, the record companies appear to be winning. Many are restricting the sale of master ringtones to songs written by the same people who perform them, artists with whom the record companies already have a strong relationship. That diminishes music publishers' clout and revenue.
As a result, record companies are commanding 40% to 50% of the sale price of master ringtones and are reluctant to share the bounty. "They're trying to reduce the cost of doing business with us to the lowest possible level and they want to cut us out of the process," complains Evan Medow, chief executive of Windswept Holdings LLC, a large independent music publisher.
The stakes are significant. According to consulting firm Consect, Sprint customers bought 500,000 copies of the master ringtone version of Beyonce's "Crazy in Love" at $2.50 a piece.
The standoff means that only a fraction of music companies' catalogs are available in the new format. Sony Corp.'s Sony Music -- now part of Sony BMG Music Entertainment -- began offering master tones last July. Today it has 800 clips for sale in the format, out of a library that contains over a million songs. Sony calls it "far and away the largest catalogue available."
Write to Ethan Smith at ethan.smith@wsj.com
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