NEW YORK (CNN/Money) -
Who said the music business is in trouble?
Sure, many people scoff at paying as little as 99 cents to download one of their favorite songs from the Web. But then you have some geeks who are more than happy to plunk down $2 or so for a cheesy 15-second polyphonic snippet of a tune so they can use it as their cell phone's ring tone. What's up with that?
Full disclosure. I am one of those geeks, having recently downloaded "Rocky Raccoon" by the Beatles to be my new ring tone. That replaced Led Zeppelin's "Black Dog."
And I'm not the only geek out there. According to Adam Zawel, an analyst with tech research firm Yankee Group, ring tone sales were about $2.5 billion worldwide in 2003. So far, most of the demand has been from Europe and Asia. Zawel estimates that ring tone sales in the U.S. were just $80 million last year.
But Zawel thinks that ring tone sales could wind up reaching $1 billion in the not so distant future as more U.S. consumers upgrade their cell phones and buy models that are capable of downloading advanced ring tones.
Zawel does not think prices are inhibiting sales since consumers seem to be eager to personalize their handsets. After all, who wants to keep hearing that annoying Nokia theme song chirping?
Your phone is alive with the sound of music
"It's unbelievable what people are willing to pay for these ring tones," said Zawel. "Certainly, if it were free more people would download them but there's probably endless room to raise prices."
So who benefits from this trend? Of course, the big wireless carriers like Verizon Wireless, Cingular, Sprint PCS, Nextel and T-Mobile do because they get a cut of the ring tone download revenues.
But Michael King, an analyst with Gartner, said that ring tones are probably not going to change the fundamental outlook for cell phone companies in the short term.
"Ring tones will be a nice little revenue bump for carriers going forward but it's not as if there will be billions and billions of dollars in their pockets tomorrow," said King.
In fact, the music industry probably stands to gain the most since they are licensing their content to technology companies that transform songs into ring tones. And then there are those techs, firms with funky names like Ztango, Zingy, MIDIringtones and Moviso, which also should hear the sweet music of cash registers ringing.
To that end, Ztango's CEO Vern Poyner said his firm, which is private, was profitable last year and expects to make money in 2004 as well. He did not disclose how much the company's sales were however.
Ring tones not a big Wall Street trend yet
Still, for investors, the only company that's remotely close to being a pure play way to try and cash in on this trend is Internet search engine firm InfoSpace (INSP: Research, Estimates), which bought Moviso last year.
In InfoSpace's first quarter, the company reported revenues from its mobile data division, which includes Moviso, of $14.8 million. This unit accounted for more than 30 percent of the company's total sales.
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But if ring tones continue to gain in popularity, it wouldn't be a shock to see tech firms like Ztango try and go public. King said he wouldn't be surprised to see more small private ring tone firms getting bought up, but not just by other techs. He said music companies might be interested so they will be able to start their own download services and take an even bigger chunk of the revenue stream.
To that end, Sony already has its own mobile ring tone service, Sony Music Mobile. That's where I bought "Rocky Raccoon." (Sony is a part owner of the Beatles catalog of songs)
I spoke with InfoSpace CEO Jim Voelker recently and he said he was not overly worried that the record labels would look to cut out middlemen like Moviso, which runs the mobile download service Ringster.
He said that the music industry, looking for any money it can find these days, is more than happy to license songs to several ring tone providers. In fact, you can download Beatles songs and other Sony-owned songs from Ringster.
And Adrian McAloon, marketing director of Ztango, said that the big record labels are particularly intrigued by the demographics, namely that the top buyers of ring tones tend to be the more free-spending (and hence lucrative) teen and young adult market.
According to a Forrester Research survey of cell phone users from last year, nearly 40 percent of mobile phone customers between the ages of 18 and 24 and 30 percent of customers between the ages of 25 and 34 were interested in buying ring tones.
"The music industry now understands that ring tones are a legitimate source of revenue," McAloon said. "Gone are the days when the theme from 'Mission Impossible' was the number one download. It's all the latest rap hip-hop urban content, a mirror of what's going on in popular music."
Well, I'm stubbornly sticking to the classic rock I grew up listening to during my suburban angst-ridden youth. Hmmm. Maybe the Who's "Baba O'Riley" should be my next ring tone.
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