Mobile and music not yet in synch: Opportunity there, but players have yet to find groove

With ringtone revenues in decline and full-track downloads struggling to find an audience, carriers and third-party vendors are working furiously to breathe life into a withering mobile music industry.
Ringtones for years have been the most popular type of content on (or off) carrier decks, generating billions in annual sales worldwide. But the music is fading at the ringtone party, as the novelty fades and tech-savvy users discover ways to make clips from their own music collections. Broadcast Music Inc. predicts that ringtones will generate $550 million in U.S. retail sales this year, down $50 million from 2006 revenues. The forecast, if accurate, would mark the first drop in U.S. ringtone sales since 2003.
On life support
The industry continues to wring out ringtones for all they’re worth, though. Apple Inc. recently added a ringtone offering, allowing iTunes users to spend an additional $1 to turn a snippet of a song purchased through the popular storefront. And Sony BMG last month introduced “ringles,” a pricey offering that bundles a ringtone with an old-fashioned CD featuring a couple of related tracks.
But a handful of online startups are hoping to drive traffic by dangling software that can be used to make customized ringtones from users’ libraries.
Mobicious recently launched an alpha version of its site, which serves as a kind of mobile content aggregator with a social networking component. The company’s technology can produce 20-second clips of users’ own tunes, sending the clips to their handsets to be used as ringtones. The idea, according to Mobicious co-founder David Chang, is to draw traffic to the site, dangle premium offerings from other vendors and split revenues.
“Once they make their own ringtones, we identify that music and show them related content,” Chang said. “We do have some Google ads on the site, but that’s mainly to set a baseline. In the long term, I think it’s going to be the affiliates and partners we develop” that generate revenue.
Full-track languishes
Meanwhile, the wireless industry continues to struggle to develop compelling-and reasonably priced-full-track offerings. An April study from Telephia found that only 3% of U.S. mobile consumers used their phones to play or download a digital song; that figure echoed a previous study from fellow market research firm M:Metrics.
So while carriers have long touted the success of their mobile services, they’re retooling their offerings. Verizon Wireless is in the process of overhauling its service, dropping its solo act and forming a trio with heavyweights MTV Networks and RealNetworks Inc. Sprint Nextel Corp. earlier this year was forced to lower the price for its over-the-air song downloads from $2.50 to 99 cents-a price that has become the industry standard for digital singles.
But it will likely take more than meeting iTunes’ price to build a successful full-track download business. While Apple is rumored to make 40% margins on its iPods, analysts believe the company sees very little net revenue from its digital music sales. So anyone hoping to offer a successful over-the-air service may need to think beyond the pay-per-song model.
“Business model experimentation with mobile audio, especially as it relates to over-the-air downloads, will be critical to success in this space,” the Telephia study urged. “Wireless providers, programmers and advertisers should be open to advertising on the mobile audio platform.”
Ads to the rescue?
While Verizon Wireless and its partners have remained mum on the details of the new service, it’s likely to include an ad-subsidized offering, much like the stripped-down version Real offers today. And Verizon Wireless will get a boost from its high-profile partners and their marketing muscle.
Nokia Corp. will also look to move the mobile music needle with a new storefront. The service, which is expected to launch in Europe this fall, offers full tracks at $1.37 each and albums for $13.70, and will bear the company’s new Ovi brand.
The full-track music download space faces a host of other problems, of course: DRM “solutions” have become anything but, preventing users from playing songs purchased from one carrier on the handset of another carrier. Wireless broadband networks will always be slower than their fixed-line counterparts, and phones built for voice conversations will always be inferior to dedicated mobile music players.
And while music labels are looking for redemption in mobile, the platform may generate disappointing revenues-even if it’s wildly successful. Users are far less likely to purchase on-the-go music in bulk, thanks to network latencies and handset limitations, according to JupiterResearch analyst Mark Mulligan.
“More consumers may buy more mobile digital music over the next couple of years,” Mulligan wrote on his company’s blog, “but those consumers will increasingly rely upon mobile for music-buying and in turn become less likely to buy albums. In short, mobile music consumers will buy more digitally, but will spend less overall.”