The Decline And Fall Of The Ringtone Empire?
By Mike Masnick, Tue Mar 01 02:15:00 GMT 2005

As the ringtone market grows, struggles over business models has resulted in some unscrupulous activities. The history of the market, however, shows why this isn't all that surprising. It began with greed and ends with greed. Very few are actually trying to build a market.

The ringtone market has received plenty of attention over the past few years, so seeing a New Yorker profile on the ringtone space seems unlikely to yield that much new information -- especially since so much of it is focused on the US market, where ringtones are still far behind other parts of the globe. However, in conjunction with a few other articles today, it's not hard to see the beginnings of trouble in the ringtone market, even as many are celebrating the market's growth potential.

The New Yorker piece quotes Les Watkins, the vice-president of Music Reports, Inc. on the license deals early ringtone aggregators struck with record labels and musicians, pointing out that the labels clearly took advantage of the upstart providers. "A lot of these aggregator companies were very early players, essentially beholden to the major record labels and the music publishers to get the rights they needed. And, in this country, the music business is a very mature and consolidated business -- somewhat collusive, in fact. The aggregators accepted rates and terms that they really didn't have to accept, and agreed to license the music in such a way that they're overpaying by a tremendous multiple." In other words, rather than looking to encourage this market to grow, the recording industry used the opportunity to extract extremely high fees from ringtone providers.

With that in mind, these providers needed to figure out ways to make enough money to cover the costs from those initial bad deals. While that starts with ridiculously high prices, it appears even that hasn't been enough for providers to make money. Even though the market is pegged at $4 billion, the high licensing fees and the extreme competition means that the actual providers are still getting squeezed, and they don't know what to do about it. A recent panel discussion on this issue shows a combination of confusion and oversimplification concerning the market, giving the sense that many of these providers are simply guessing about what really works.

The end result has been that the scammers are starting to move in. The BBC is reporting new rules are being put in place in the UK to help mobile operators cut off questionable ringtone sellers who are tricking subscribers with misleading offerings. It appears that many of these ringtone providers, in trying to deal with the squeezed margins and competitive threats has decided that if they can't come up with a better product, they might as well try to trick money out of users.

The scam is pretty simple. A ringtone is offered to a buyer, but the buyer doesn't realize he or she has really signed up for a subscription service which will add a charge every month. In theory, this does entitle subscribers to a series of ringtones, should they make use of it. Most of the users, however, think they've only bought a single ringtone, and don't make use of the later ability to download ringtones. This has to be an incredibly short-lived scam. While some users will not carefully check over their bills, enough will notice the questionable charges and contest them. Now that operators can kick these questionable sellers off, as well, it's a scam that's not long for this world.

However, it does show some level of desperation among the sellers of these ringtones, and suggests that this might just be the beginning of more difficult times for these providers. As more users realize they can route around high fees and deceptive practices, it becomes more and more difficult to figure out where the real business models will be. There is clearly a demand from end-users to get ringtones on their phones. However, starting from the very first price gouging, the industry has been set up to fail over time.