Can Cell Phones Save the Music Business?
By Matthew Maier

(Business 2.0) – Looking to build buzz around hip-hop artist Cassidy, Sony BMG shunned CD singles and MTV sneak previews. Instead, the label chose a track called "I'm a Hustla" from Cassidy's new album and turned it into a 25-second sample that could be downloaded as a ringtone.

The $2.49 song clip, known as a mastertone, was an instant hit. In four months it was downloaded half a million times. By the time the album finally debuted in June--at No. 5 on the Billboard chart--the ringtone had gone platinum. "The ringtone market is the singles market of our time," says Thomas Hesse, president of Sony BMG's global digital-music division.

Record labels see ringtone demand as a sign that music sales are moving to cell phones. Last year consumers spent $4 billion on ringtones, with about 30 percent going to mastertones. This month Motorola and Sony Ericsson are rolling out handsets capable of downloading and storing hundreds of songs; Nokia's will debut this fall. "We think that, for some people, the phone will eventually replace the MP3 player," says Thomas Ryan, a senior VP at EMI.

That will depend on what happens when wireless carriers begin delivering full-length songs to phones. Verizon Wireless is rumored to be launching a nationwide 3G (third-generation) music service selling mastertones and songs this fall. Its rivals won't be far behind. "There will be some advanced music services in place by the end of the year," admits Mark Nagel, director of Cingular's entertainment services group. Market research firm Strategy Analytics expects mobile music to be a $9 billion business by 2010.

The phone is the first real digital-music moneymaker for record labels, because they bring in much more from cell-phone downloads than from other digital outlets. Mastertones sell for nearly three times as much as iTunes tracks, and the labels often command royalties as high as 50 percent. "In a little more than a year, we've generated as much revenue from ringtones as from all other digital music combined," says Sony BMG's Hesse. That take came to roughly $125 million in 2004.

As soon as full song downloads take off in a few years, mastertone prices will likely drop. Thomas Dolby Robertson, a former pop star who founded Retro Ringtones, thinks the clips will eventually be free. "We're sort of like drug dealers, using ringtones to get people hooked on digital music," Robertson says. If recent sales are any clue, we're becoming a nation with a serious jones. -- MATTHEW MAIER