October 01, 2006

The availability of sophisticated handsets is proving to be a mixed blessing for the U.S. ringtone market.

While a majority of cell phones allow people to personalize their devices with downloaded snippets of recorded tracks known as mastertones, newer handsets may make it easier for consumers to create ringtones from recorded music and bypass phone carriers and record labels altogether.

According to Seattle mobile-content research firm M:Metrics, about 20.1 million people in the United States downloaded at least one ringtone in August, with 18.2 million ordering a ringtone directly through their handsets and 5.2 million downloading first to personal computers (with some doing both).

In February, the total number of monthly ringtone purchasers was 18.6 million, or about 10 percent of the U.S. cell phone market, and 16.6 million in August 2005.

But perhaps more disconcerting to wireless and record label executives are the 11.5 million people in August 2006 who said they created their own ringtones from recorded music and transferred the files to their cell phones in a process known as "side-loading."

"Increases in side-loading will definitely have a negative impact on the ringtone market," says Sanjaya Krishna, a Tysons Corner, Va.-based senior manager in KPMG's information risk management practice.

"Mobile phones have traditionally been a closed system, but smart phones and other handset models allow consumers to have more control," Krishna says. "This includes side-loading third-party applications and, more importantly, media such as ringtones. Make-your-own ringtone software allows consumers to cut and edit their own tones from CDs or MP3 files that can be side-loaded onto the handset."

The increased online availability of software that allows consumers to turn short segments of their favorite music into free ringtones is reducing sales, as is the increased adoption of sophisticated handsets that feature removable memory or the ability to synch data with personal computers, according to Jen Wu, an entertainment analyst with M:Metrics.

"When you see more advanced devices and evolving ways to make your own ringtones for free or to use MP3 files as ringtones, the market for ringtones that are bought is flattening," Wu says. "Consumers still want personalization, but the market is becoming a little more savvy."

But handset evolution also has prompted more consumers to purchase mastertones, which are short segments of popular tunes derived from the original recordings. Such mastertones are largely replacing polyphonic ringtones (which combine different notes into a facsimile of a song) and their precursors, single-note monophonic tones.

"We're seeing increases in [mastertone] volumes on a weekly basis," says Paul Leakas, general manager for Nielsen Mobile in White Plains, N.Y., which is developing a sales-tracking and reporting service for digital music products, including ringtones. "Sales of polyphonic tones are decreasing, but that's being outpaced by the growth in mastertone sales volumes."

According to M:Metrics, 9.9 million consumers reported downloading a mastertone ringtone in August. That compares with 9.2 million people who purchased a polyphonic tone.

Leakas says today's handsets, many of which support mastertones and digital music files, are helping expand overall sales beyond the youth-oriented hip-hop tracks that have dominated sales in past years. Within the past six months, genres such as country and classic rock have made inroads into the ringtone market.

"There's been an evolution of technologies and devices," Leakas says. "When ringtones were primarily monophonic and polyphonic, R&B and hip-hop tracks sounded the best. Tracks with a good beat lent themselves to good polyphonic ringtones. With more mastertones appearing on devices capable of playing them, consumers are able to enjoy additional genres."

A related development, according to M:Metrics' Wu, is that downloading ringtones is considered more mainstream than ever. For instance, carriers see potential growth among consumers over 35.

"We're starting to see market saturation in the teen market, but at the same time, it's growing for above-35-year-olds," she says. "The ringtone market is still growing in the United States. It's starting to flatten, yes, but it definitely hasn't declined yet. We don't think it's at a saturation point."

Offering a wider range of musical genres is an important development in promoting sales, but capitalizing on it requires sophisticated ways of educating consumers and helping them download ringtones.

While lists of the latest and best-selling tracks were sufficient when ringtone sales were dominated by youth-focused chart-toppers, carriers are working to improve text-based search engines to help consumers easily find a specific ringtone.

"Carriers are looking for ways to make the consumer experience as simple as possible, and good search tools allow them to widen their offerings," says Nielsen Mobile's Leakas.

Record companies and wireless carriers are also exploring price options to combat side-loading. Because many consumers will balk at paying $2.99 for a 30-second section of a song they can purchase in its entirely for 99 cents, Leakas says some wireless carriers and Web sites are experimenting with selling bundles that include full-length tracks and ringtones.

Wireless carriers are also responding with new personalization technologies including "ringback tones" that allow a consumer to choose what callers hear when they dial his or her phone. Instead of a standard ringing sound, callers can hear a song segment selected by the phone's owner.

Ringback tones are configured on the carriers' network, instead of the consumers' handsets, which makes the tones resistant to side-loading and piracy, and protects the carriers' and record labels' revenue streams.

Wu says the market for ringback tones is likely to evolve slowly as consumers get accustomed to dialing someone and hearing music.

"People wonder why they don't hear ringing, so there's an adjustment factor, but it's a growth area for the carriers," she says.

By Dave Pelland, Managing Editor, Technology Insider

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