Making or breaking the new single
The music industry has always placed value in numbers. There's an old Elvis Presley collection called “50,000,000 Elvis Fans Can't Be Wrong,” and albums are awarded gold and platinum status based not on artistry, but on the millions of copies they've sold.
So for a market still in its infancy, global ringtone revenue projections of $2 billion should be making the music industry salivate — by comparison, compact disc sales brought in $26 billion last year. But so far, the musical wireless phenomenon has only achieved hit status in Asia and Europe. The U.S. has barely registered on the charts — U.S. ringtone sales accounted for less than $17 million in 2002.
“When compared with Asia and Europe, the results here have been nothing but underwhelming,” said Michael Nash, senior VP for Internet strategy and business development at Warner Music Group.
Warner Music, Sony Music, Vivendi-Universal, EMI and BMG are the big five of the industry, producing the vast majority of today's commercially recorded music. They would appear to have a major stake in making their music available for broadcast over millions of American handsets. It may seem that the record industry has been dragging its feet in making that happen, but the labels insist the opposite is true — and that the wireless industry is holding them back.
The issue is technology. While polyphonic and digital ringtones can easily traverse new GPRS and CDMA 1x networks, the technology necessary for playback has not yet proliferated into the average handset. In addition, the U.S. is not just the biggest wireless market in the world — it's also the most complex. Unlike Japan or European countries where a few dominant carriers share the same standardized technology, the U.S. market comprises two major technologies, a half-dozen major carriers and dozens of vendors.
“There's a great deal of market fragmentation here,” Nash said. “To aggregate three-quarters of the market here, you have to deal with six separate carriers that not only have their own technologies, but their own ideas for differentiating their service.”
But carriers can't shoulder all the blame. The recording industry claims it has lost more than $10 billion to digital file-trading since 1999, and record executives will be the first to admit they'll have nothing to do with a burgeoning ringtone industry if there is any chance the mobile equivalent of Napster will come of it. And while the music industry has fought off attempts overseas to establish ringtone-trading networks, the U.S. wireless industry is still holding out in the face of pressure from handset vendors seeking to deploy open-architecture devices, said Larry Kenswil, president of Vivendi Universal's eLabs, the media conglomerate's new media division.
“We're simply not going to invest in open systems,” Kenswil said. “In Europe, carriers understand that to create a market, you have to control the content. If people are freely exchanging ringtones, the carriers lose out on revenue along with us.”
Another problem is the complex intellectual property laws and agreements that exist in the U.S. Monophonic and polyphonic ringtones are not created from so-called “master recordings” — the hit original version heard on radio, for example — but are computer-generated via MIDI technology. In such cases, ringtone royalties are split among the songwriter or composer, the creator of the MIDI file and the music publisher. The labels theoretically collect no royalties.
In truth, all the major labels own and operate their own music publishing divisions, so they do collect publishing royalties whenever a ringtone is sold. But their revenues are far less significant than if the original recorded master were used to make the ringtone itself. “There are so many levels of rights to deal with in this industry — mechanical rights, transmission rights, performance rights — but when we're dealing with polyphonic MIDI files, the majority of the royalties still go to the publishers,” said Richard Conlon, vice president of business development for BMI, the largest clearinghouse for songwriting and performance rights in the U.S. “Now that we're starting to talk about using the actual songs recorded by the actual artists, it's becoming much more attractive to the labels.”
Using master recordings to create ringtones not only brings a far larger percentage of revenues into a record label's coffers, it also allows them to more directly control the quality of the recording on the market. So not only will their share of the profits grow, but their overall sales of music stand to benefit. “The ringtone is kind of like the new single,” Nash said. “We've had 10 times more sales off ringtones of a given song than CD-single sales.”
Ultimately, U.S. labels would have everything to lose by inhibiting ringtones. Deals are starting to get signed, label by label, carrier by carrier. And while labels are dead-set on protecting against electronic theft, they say they are otherwise open to any opportunity the wireless industry cares to present. “Our only expectation is that people pay for this content,” Kenswil said. “That's our only bias.”
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© 2013 Penton Media Inc.
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