The worldwide mobile music market will more than double in the next few years, exploding from $13.7 billion this year to more than $32 billion by 2010, according to Gartner Inc.
But splitting up all that cash won’t be easy.
While boilerplate agreements don’t exist in the world of ringtones, music labels generally get about 50% of revenues from the music clips, and carriers demand roughly 40%. The remaining 10% goes to the distributor-as does the responsibility of making sure everybody else in the value chain gets a taste.
“On an Eminem track (for example), Universal owns the digital assets,” said Ted Suh, CMO of 9 Squared Inc., a Denver-based subsidiary of the Spanish mobile content behemoth LaNetro Zed SA. “We have to take into consideration all the people who wrote (the song) and produced it. There may be three other guys (performing on the track), and there’s typically a sample” of another artist’s tune involved.
River running dry
And it’s not like there’s much wiggle room anymore. Once a massive cash cow, the novelty of the clips seems to have worn thin with consumers, and many Web sites and off-the-shelf software offerings allow users to create their own tunes on the cheap, or even free. The major labels have cut deals directly with carriers, leaving ringtone aggregators out of the loop entirely, and operators have become less willing to negotiate with aggregators.
Worse, industry insiders say roughly 30% of all off-deck content sales are lost to “leakage”-billing snafus that result in unnecessary refunds or a failure to charge a customer for a piece of purchased content. And many of the traditional marketing vehicles for third-party content-such as MTV Networks’ high-profile channels-have jumped into the mobile content game themselves, making it more difficult for lesser-known vendors to market their wares.
Creativity key
So ringtone vendors are getting creative with their wares, offering voice tones from celebrities and outside-the-box applications such as Moderati’s Mobile Faker, which gives users an excuse to duck out of bad dates. And they’re forging pacts that allow carriers exclusive rights to specific songs or artists for a limited time.
“The way those deals are typically done is, ‘How much are you going to be able to give me up front?'” explained CEO Brian Casazza of 9 Squared, which earlier this year teamed with Phish on an exclusive deal that made the band’s ringtones and ringback tones available only to Verizon Wireless subscribers. Verizon Wireless made headlines again last week when it scored the mobile rights to Led Zeppelin hits such as “Stairway to Heaven” and “Kashmir.”
“Those deals typically offset (an advance from carriers) against revenue share over the course of the deal,” Casazza said.
Full-track just as tough
But while ringtone vendors must face revenue-share models that have had time to evolve, fulltrack mobile music companies are finding a little more leeway with carriers, according to Groove Mobile CMO Adam Sexton. Groove powers mobile music services for Sprint Nextel Corp., the U.K. operator 3 and other carriers in North America and Europe.
“We’re not at a point where every label is the same (in terms of revenue-sharing policies). They’re all a little bit different,” Sexton said. “There isn’t just a static margin discussion over, ‘Do you get 50%, 45%, 40%?'”
That kind of flexibility will be necessary while the full-track download space finds the right combination of price points and business models. The carrier 3 was forced to raise the price of its mobile music downloads by 30% to address the “very narrow” margins it said the service delivered; the announcement followed Sprint Nextel’s drastic price cut from $2.50 to 99 cents for its songs.
The moves required both the carriers and their label partners to take a hard look at the market for full-track downloads and react accordingly, according to Sexton.
“3 went into heavy negotiations with the labels and ended up having to raise their price,” Sexton claimed. “Definitely, a big piece of the discussion that Sprint had with the labels was around balancing out (the revenue-share agreement).”
Marketing played a key component in 3’s renegotiated pacts with carriers, Sexton said, and the carrier’s full-track service has continued to gain steam despite the price increase because of ramped-up advertising.
Some believe the case has yet to be made for a viable, full-track mobile music service. Apple Inc.’s iTunes has effectively set the bar at 99 cents per song-a price point carriers may not be able to match-and the vast majority of users thus far have been unwilling to pay a premium for over-the-air music downloads.
But if mobile and its music partners can spread the wealth throughout the value chain-and then market the stuff effectively-mobile music may finally gain mass-market traction.
“What we’re trying to do here is build an ecosystem,” Sexton said. “You can’t do a 50/50 split; that doesn’t work. There has to be a piece for the technology provider, there has to be a piece for marketing spend.”
