growthink

Growthink Research and

Analysis of the Wireless
Music Industry
Threats and Opportunities
 growthink
Summary Findings
The US ringtone market is poised for rapid growth

„ Traditionally, the US mobile market has lagged behind European and Asian (Japan and South
Korea) markets in accepting value added services, primarily due to the use of multiple mobile network
standards.
„ However, the US mobile market is fast catching up, and as a result, the US ringtone market is
expected to increase its revenues from $80 million in 2003 to $652 million in 2008.

New products and infrastructure improvements led to improved prospects

„ The dramatic growth in the US ringtone industry is primarily due to new products. The master tones
and streaming music applications, which in 2003 contributed a miniscule $5.3 million, are expected to
contribute $486 million in 2008.
„ Improvements in network infrastructure and ringtone technology have also contributed to the growth.
The US mobile markets are finally catching up with Europe in the deployment of 3G technology.

However, new entrants may play party poopers

„ The anticipated high growth trajectory of the industry is attracting other players into the market. The
key competitors intent on entering the space include music labels, wireless operators, digital music player
manufacturers and online music download companies.
„ The music labels are attracted to the ringtone industry due to the emergence of master tones that
will allow them to collect royalty payments. The digital music player manufacturers are looking at embedding
the mobile phones with their own music technology platform. Following this, the online music download
industry will be able to offer direct downloads to the mobile phones.
„ The new entrants into the ringtone industry bring with them established brand names, significant
financial muscle and rights to the underlying content. As a result, the existing players in the ringtone industry
face a tough time ahead.

Hence, content acquisition and consolidation remain the key to survival

„ The music labels, attracted by higher royalty payments on master tones, and wireless service
operators, looking to increase their share of the revenues, are likely to try bypassing the existing ringtone
industry, as evidenced by a spate of recent deals.
„ To counter this trend, current ringtone industry players have to acquire master rights to the content,
primarily through acquisition of smaller record labels. Further, a consolidation of the mobile entertainment
industry (spanning ringtones, mobile games and other content) will help in retaining bargaining power with
the wireless service providers.
Table of Contents

Market overview .................................................................................................................. 4

Industry size & growth .................................................................................................. 4

Industry segments ........................................................................................................ 5

Industry value chain...................................................................................................... 7

Impact of technology........................................................................................................... 8

3G deployment ............................................................................................................. 8

Handset capability ........................................................................................................ 8

New challenges - Shift in the value chain ........................................................................... 9

Tie-ups between music labels and wireless operators ................................ 9

Mobile phones and digital music players.................................................................... 10

Case study 1: Motorola - Apple alliance..................................................................... 11

Case study 2: Nokia - Loudeye alliance ..................................................................... 11

Strategies of market participants ...................................................................................... 12

Expanding market - New participants......................................................................... 12

Strategy: Strengthen relationship with wireless service operators............................. 13

Strategy: Retain access to content from record labels............................................... 13

Strategy: Participate in the consolidation of mobile entertainment industry............... 13

Possible M&A ideas .......................................................................................................... 14

Appendix 1 - Ringtone companies .................................................................................... 16

Appendix 2 - Mobile gaming companies ........................................................................... 17

Appendix 3 - Media/Music companies .............................................................................. 18

3

US ringtone industry
expected to generate
revenues of $214 million in
2004
Market overview
Industry size & growth
The ringtone industry has become one of the “hot spot” revenue-generating streams of
the wireless communication industry. Driven by the all too humane need for individuality,
mobile users are increasingly expecting their ringtones to reflect their personality in an
otherwise commoditized wireless communication system. As a result, the ringtone
industry, has achieved critical mass in the last few years. In 2003, the global ringtone
industry is estimated to have touched revenues of $3.1 billion. Traditionally, the US had
been a laggard in developing its mobile communication infrastructure. While European
and Asian (Japan and South Korea) mobile networks have surged ahead following the
adoption of common technology standards, the US mobile market has struggled with
multiple technologies and consumer reluctance to switch to new mobile applications. The
scenario is the same in the ringtone industry, with the US market expected to contribute
just 8% to the global ringtone industry in 2004.

Figure 1 Global ringtone industry revenues by geography (2004)

Rest of the
World
18% Western
Europe
US 37%
8%

Korea
13%

Japan
24%

Source: Consect LLC

In the US, most of the national level wireless operators have established relationships
with ringtone companies and music labels to provide ringtones to mobile subscribers. The
final delivery to the subscriber is made both through the portals of wireless service
providers (AT&T’s mMode, Sprint’s PCS Vision and so on) and through independent
websites of ringtone publishers (premium SMS).

Figure 2 US ringtone industry revenues by wireless operator (2004)

Others
Verizon
11%
17%
Virgin
Mobile
7%
T-Mobile Cingular
11% 16%

Nextel
10%
AT&T
Sprint 13%
15%

Source: Frost & Sullivan

4
Forecasted revenues of
$651 million show the
growth potential of the US
ringtone industry
The US mobile markets have however begun to finally catch up with the European and
Asian markets. Increased investments by the US wireless operators in 3G rollout as well
as a slack in 3G investments by European operators during the last few years have aided
this. Moreover, the US subscribers, long satisfied with plain vanilla voice products
compared with their more adventurous counterparts elsewhere, have finally began to
subscribe to value added data services.

In the US ringtone landscape, breakthrough products such as master tones and

streaming mobile music have also influenced the positive developments. As a result, the
US ringtone industry is expected to grow substantially in the next few years, from an
estimated size of $215 million in 2004 to $651 million in 2008. Moreover, developments in
technology and infrastructure will change the revenue contribution from different
segments during the period. This is expected to lead to the timely death of the “jarring”
monophonic tones and the dominance of master tones and streaming music.

Figure 4 US ringtone market revenue trends ($ million)

400
352
292
300
226
189 201
200 182
165
139 134
137
100 83
60 55 45
10 20 15 16 11 22
5 1 5 5
0
2002 2003 2004 2005 2006 2007 2008
Monophonic Polyphonic Master tones Streaming music

Source: Frost & Sullivan

Industry segments
The ringtone industry in the US is still at the early development stage. Developments in
the wireless communication industry, including the deployment of 3G technology,
increased focus on data and value added services to improve the otherwise declining
average revenue per user (ARPU), are expected to create significant opportunities as
well as threats for the ringtone industry. The ringtone industry can be broadly classified
into the following four segments:
ƒ Monophonic tones
ƒ Polyphonic tones
ƒ Master tones
ƒ Streaming music

Figure 5 Summary of development status - US ringtone market

Estimated market Estimated market
Development Technological Threat of new size in 2004 size in 2008
Segment stage impediment competitors ($ million) ($ million)
Monophonic Declining None None 15.8 0.0
Polyphonic Developing None Low 138.8 165.4
Master tones High growth Handset availability High 55.0 352.3
Streaming music Initiating Network infrastructure Very high 4.9 134.0
Source: various websites

5
Master tones and Monophonic tones: Monophonic ringtones were the earliest form of ringtone
streaming music is applications. These ringtones, which are stored in the handset, can reproduce only one
expected to provide most tone (hence the name) and were the key drivers of mobile music applications, especially
of the revenue growth in phones with low audio capabilities.
potential
Polyphonic tones: Polyphonic ringtones enabled simultaneous reproduction of multiple
tones, and as a result more closely resemble the actual song/composition. The
polyphonic tones are also credited with a richer sound, and hence, increased the level of
interest and acceptability among end-users. As a result, polyphonic tones marked the
next step for the ringtone industry in its attempts to replicate the actual song/composition
as a ringtone.

Master tones: Master tones were literally the masterstroke of the ringtone industry. For
the first time, the industry was able to offer near-studio-like sound quality in its products.
Master tones, in addition to better sound quality, also allowed the ringtone industry to
offer accompanying voice to the music. As a result, entire songs, with the voice track of
artistes, are now available for use as a ringtone.

Streaming music: The “killer app” for the ringtone industry is already looming in the
market. While mobile handsets with streaming music capabilities currently form a
miniscule part of the handset market, this is expected to change dramatically in the next
three-to-five year period. The push towards streaming music applications will come from
mobile service providers, handset makers and end-users. Following the astounding
success of digital mobile music players, especially iPod, the handset industry and cellular
service providers are preparing for the convergence of mobile players with digital music
players.

Figure 7 US ringtone subscriber trends (in millions)

20 18.5
18 16.3
16 15.2 15.3 15.4
13.5
14
11.3
12 10.0
10
8 7.2
6 4.7 4.5
3.5 2.9 3.5 2.4
4 2.2 2.4 2.1 1.6
2 0.3 0.1 0.5 0.9
0
2002 2003 2004 2005 2006 2007 2008
Monophonic Polyphonic Master tones Streaming music

Source: Frost & Sullivan

6
 Industry value chain
The ringtone value chain involves sourcing of the content, development of the mobile
music application and the final delivery of content to subscriber handsets. However, the
value chain is increasingly getting fuzzy as players in different segments of the market
are considering vertical integration to retain a higher share of subscriber revenues.

Figure 8 The ringtone industry value chain

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Mobile
Music Music Service
platform/ Network Device
Development production/ acquisition/ provider/ Consumer
application operators manufacturer
publishing aggregation portal
provider

Provides delivery, access

Produces access devices

DRM, billing, MMS, etc…
Develops applications for
mobile platform. Includes
Acquires and aggregates
Creation of music pieces

content and subscription

mobile service. Includes
Holds licensing rights to
Signs, records, markets

reproduction on various

capable of storing, and

and distributes music.

and network services.

Creates the interface,

bundles and markets
May offer billing or
performances and

replaying music.
music rights for

management.
recordings.

channels.

hosting.

Source: Research seminar on telecommunication business, Helsinki University of Technology

The ringtone value chain is The value chain begins with the production of the content (music), which is the output of
getting disrupted due to performers and composers. Record labels then acquire the content and publish it either
technology changes in-house or by using other music publishers. The record labels own the rights to the
master copies of the song/composition, and hence, will be the beneficiaries of any royalty
payments resulting from the licensing of the master copy. Thus, music labels gain a
share of the royalty payments with master tones, which require the licensing of the
master copy. However, with monophonic and polyphonic ringtones, the music publisher
gains the royalty payments as the production of these do not require any access to the
master copy of the music.

The ringtone value chain deviates from the traditional music value chain at this point. In
the ringtone value chain, aggregators purchase a wide selection of audio tracks and
develop suitably encoded audio files. These files are then moved to the mobile
application platforms, provided by vendors of network equipment such as Nokia and
Ericsson. The mobile network operators deliver the mobile music content, which is made
available by wireless portals, ringtone providers and broadcasters to the subscribers. The
handset manufacturers play an important role in the value chain by developing suitable
platforms for mobile music compatibility of handsets and incorporating digital rights
management (DRM) capabilities to guard against unauthorized copying of the content.

The developments in mobile music technology, leading to master tones and streaming
music, have increased the stake of several players such as record labels, mobile network
operators, online music download services and digital music player manufacturers. As a
result, the ringtone value chain is undergoing rapid changes, including attempts by record
labels and wireless operators to bypass the ringtone providers.

7

Better handset capabilities
and 3G deployments are
the key drivers of the
mobile music market
Impact of technology
3G deployment
3G mobile infrastructure primarily allows higher data speeds compared with the previous
mobile network versions (2G or 2.5G). While technologies such as GPRS (associated
with 2.5G) can be used to download data from the Internet, the speeds are too low (up to
114 kbps) to promote data-intensive downloads such as master tones and streaming
music.

Hence, the implementation of 3G networks has been the key to improve mobile Internet
access speeds, which in turn, is expected to allow wireless operators to offer value added
services such as video broadcasting and streaming music. During the tech-led boom in
2000, wireless operators, primarily in Europe, spent approximately $125 billion to win 3G
licenses. However, following the tech-bubble burst, many European wireless operators
had to drastically reduce their investment plans in 3G networks.

In the US, development of mobile networks was hampered by the lack of a single
standard for network infrastructure. While Europe adopted GSM standard for mobile
networks in 1987, US operators continued to develop multiple standards including TDMA,
CDMA and GSM. As a result, the US mobile market could not benefit from the economies
of scale in terms of network infrastructure and handset costs. The use of multiple
standards continued in the US even in the development of 3G networks. Once again,
Europe quickly reached a consensus standard (UMTS) while the US slowly labored to an
agreement choosing W-CDMA (same as UMTS) and CDMA 2000 as the preferred
technologies for the 3G network rollout.

However, despite the delays, the US 3G rollout is finally catching up with Europe,
primarily due to the reduced investments made by the European players in the last few
years following the tech-bubble burst. The readiness of the major US mobile operators in
offering value-added ringtones is illustrated below.

Figure 9 US ringtone market: Status of leading operators (2004)

Verizon Cingular AT & T Virgin
Music Service Wireless Wireless Wireless Sprint PCS T-Mobile Nextel ALLTEL Mobile
Monophonic Tones Yes Yes Yes Yes Yes Yes Yes Yes
Polyphonic Tones Yes Yes Yes Yes Yes Yes Yes Yes
Master Tones Yes Yes Yes Yes Yes Yes Yes Yes
Streaming Music No No Yes Yes No Yes No No
Source: Source: Websites

Handset capability
Along with network infrastructure, handset capability is another bottleneck for the ringtone
industry. Currently, a vast majority of the mobile handsets in the US are not enabled to
play master tones or streaming music. This was another limiting factor for the
development of the US ringtone industry into higher value added services. However, the
following table illustrates the forecasted rapid development of the US handset capability
in the near future. This is also likely to contribute to a faster growth in the usage of
ringtones.

8
Figure 10 US handset evolution by ringtone capability
1%
100% 5%

27%
80%
50% 55%
71%
60% 68%

58%
40%

49% 39%
20%
27% 28%
14%
6% 1%
0%
2003 2004 2005 2006 2007

Monophonic Polyphonic Master tones/Streaming music

Source: Jupiter research

New challenges - Shift in the value chain

Music labels and wireless The US ringtone industry has shown substantial growth in the past two years. Moreover,
service operators joining future growth prospects are even brighter, as the US market catches up with European
hands to bypass the and Asian (particularly Japan and South Korea) markets. This is bound to attract other
ringtone industry players into the industry. Currently, the biggest threat facing the industry is the possible
entry of music labels into the ringtone business. Even if most of the music labels decided
against entering the market, their influence would increase as a result of the anticipated
technological changes. Other challenges that face the ringtone industry are the
convergence of mobile phones with digital music players and entry of online music
portals. More importantly, there is a trend of music labels bypassing ringtone industry
players by directly tying up with handset manufacturers or wireless service providers to
provide ringtone content. As a result, the ringtone value chain, which currently
encompasses three major industry groups (content providers, application
developers/aggregators and wireless network providers), might contract by bypassing the
application developers/aggregators stage.

Tie-ups between music labels and wireless operators

In monophonic and polyphonic ringtones, the royalties from the sale of the ringtone is
split among the music publisher, application developer, content aggregator and wireless
operator with music labels receiving no royalty payment. Thus, in the initial phase of the
development of the ringtone industry, music labels had little role to play.

The introduction of master tones, however, changed the landscape of royalty payments
for ringtone products. Master tunes require the master copy of the song/composition
(studio recorded version), which is held by the music labels. Hence, music labels are now
in a stronger position to grab a share of the royalty from ringtone industry. Moreover,
slowing record sales, primarily due to the music industry’s reluctance to launch viable
online music stores and the resultant growth of illegal P2P music sharing, has forced the
record labels to look more closely at the ringtone industry as a future revenue stream. As
a result, in the last year, there have been several deals between music labels and
wireless service providers to provide content for mobile audio and other applications. The
aggressive strategy pursued by music labels to enter the ringtone business will have
negative implications for the existing players in the ringtone industry. The primary
concern is that the ringtone industry is getting bypassed with music labels directly dealing
with wireless operators. The table below gives a summary of the recent deals between
record labels and wireless service providers.

9
Figure 11 Recent tie-ups between music labels and wireless operators
Wireless Content
Operator provider Details of the agreement
AT&T Warner Music Non-exclusive agreement to provide mobile content including ringtones to 20 million
Group AT&T customers
Vodafone Sony Music Tie-up to provide mobile music content including ringtones
Entertainment
Verizon Rhino records JV with Rhino Records (part of Warner Music Group) to provide mobile content
including ringtones to Verizon Wireless Get It Now customers.
T-Mobile Warner Music JV to provide over 200 Realtones and other mobile content to T-Mobile customers in
international the UK, Germany, Austria and the Netherlands. T-Mobile US already has similar
agreements with Warner Music Group in the US
Orange Warner Music UK Tie-up to provide ringtones to Orange service users in the UK
Sprint Warner Music Agreement to offer the first wireless streaming music clip subscription as well as
Group master tones (including animated and voice ringtones) in the US. The service will
provide celebrity voice and animated ringers ($2 per download) polyphonic ringtones
($1 per download) and streaming audio samples of new music ($3.99 for a three-
month subscription)
Verizon Sony Music JV to offer mobile ringtone including music tones, celebrity ringers and animated
Entertainment Ringtones to Verizon Wireless Get It Now customers
Sprint Universal Music JV with Universal Music Group to provide music tones
Group
Sprint BlingTones Agreement to offer master tones and images of new Hip-Hop artists, $2.5 per
download of master tones and $1.5 for picture downloads
Sprint BMG JV to provide music tones from BMG music library; polyphonic tones at $1.5 and;
music tones, animated and voice ringers at $2.5 per download
T-Mobile Sony Music JV with Sony Music to provide music tones to T-Mobile customers in the US and
select European markets
Source: Websites

Mobile phones and digital music players

Convergence of mobile
phones with digital music
players expected to benefit
online music download
industry
The history of mobile phones has been about convergence. At various points, prophets
have foretold the convergence of mobile phones with sundry other items. These include
the computer, PDA, camera, TV, audio and video player. Most of these applications were
expected to come to the fore once 3G networks were rolled out and telecom operators
quoted expected revenue streams from these segments while bidding astronomical sums
for 3G licenses in Europe. While the applications have indeed arrived, most of them
proved to be niche (computer, PDA) or with no strong revenue generating stream for the
operator (camera). However, lately, the mobile entertainment products, particularly
ringtones, have taken off. The ringtones along with mobile gaming and screen savers
have been particularly popular with the younger generation and thus allowed operators to
generate additional revenue.

In the last two years another significant revolution has been playing out in the digital
music player industry. Led by Apple with its revolutionary iPod and other players such as
iRiver and Creative, the digital music player industry has witnessed astronomical growth
rates. Currently, most of the players in the digital music industry have hard-drive-based
models, with up to 60 GB in memory and weighing little more than a mobile player. The
growth of the industry, along with concerted legal action by music label industry (to
combat P2P piracy), has also enabled a viable, legal online music download industry to
develop. These two developments have enormous implications for the ringtone industry.

With the introduction of master tones, music labels, handset manufacturers, digital music
player manufacturers and online music download players have started jockeying for
leadership positions in this nascent market. While mobile phones with real music
capability are still a niche segment (primarily the smartphones) and their memory
capacity is miniscule compared with the gigantic capacities offered by hard-drive-based

10
 digital music players, the segment is still expected to show rapid growth in the near
future. As a result, various players in the industry are forming up alliances to gain an
entry into the market. We will discuss two recent deals, involving Motorola, Apple and
Nokia, which aimed to target the mobile download industry.

Case study 1: Motorola - Apple alliance

Motorola plans to In July 2004, Motorola and Apple announced that Apple would customize its iTunes juke
piggyback on the box software, which will be embedded on Motorola’s future handsets. The handsets are
popularity of iTunes expected to reach the retailers in the first half of 2005. Currently, the envisaged product
will not allow direct downloads from iTunes website. Rather, tracks will have to be
downloaded to the computer and then transferred to the mobile phone via Bluetooth or
USB port. However, the partners claim that they plan to start working on handsets that
will allow direct downloads to the mobile phone. Motorola is the world’s second largest
handset manufacturer (expected to be soon overtaken by Samsung) and Apple’s iPod
and iTunes are the largest players in the hard-drive-based digital music player and online
music download industry, respectively.

Case study 2: Nokia - Loudeye alliance

Nokia offers better Barely two weeks after the Motorola-Apple alliance, Nokia, the world’s largest handset
incentives for wireless manufacturer, announced its own alliance to reach out to the mobile music market. It
operators announced a deal with Loudeye, a digital music distributor, to develop a music download
platform for mobile phones. The deal will enable Nokia’s handsets to be equipped with
Loudeye’s mobile music technology platform, which can then be used to download music
directly from wireless network operated download services, thereby skipping the first level
of technology that Motorola - Apple alliance are aiming at.

The difference in the two agreements reflects the industry position of the key players. In
the Motorola – Apple alliance, Apple seems to be the dominant partner. The deal allows
Apple’s iTune music download services to garner additional revenue opportunities.
Motorola gains from the iconic brand equity that iPod and iTunes have established in the
last few years and can expect that brand loyalty to rub off on the sale of its iTunes-
enabled handsets. The Nokia - Loudeye alliance allows Nokia to develop handsets with
music download facility. The music downloads will be enabled through services operated
by wireless operators and hence the operators are assured of a larger cut from the
subscriber download revenues. This might induce the wireless operators, who buy bulk
consignments of handsets and sell it after bundling with their own services, to favour
Nokia handsets in the future.

Earlier in the year, Real Networks, the archrival of iTunes, had announced an alliance
with Sony Ericsson to equip the latter’s handsets with Real Player, which will support
music and video playbacks. Other recent developments include rolling out of Napster’s
US mobile music download services, which are now available for download through
Windows Mobile 2003 second edition-based smartphones including AT&T’s Audiovox
SMT5600. The service currently has a monthly subscription of $14.95.

11
 Strategies of market participants
Expanding market - New participants
Strong growth potential The ringtone industry has evolved over the last few years into becoming an important
makes the ringtone revenue stream for wireless operators. However, developments in ringtone technology,
industry attractive to new deployment of 3G infrastructure and success of digital music players have created
players several challenges for the industry. These developments have stocked the interest of
players in several related industries all of which are trying to establish a foothold in the
“mobile music entertainment industry”. The new competitors for the ringtone industry are
ƒ Music labels
ƒ Wireless service operators
ƒ Digital music player manufacturers
ƒ Online music download industry

Music labels: In the past, music labels did not believe the ringtone industry to be an
important revenue stream. However, smarting from its failure in the online space, where
iTunes, Real Networks and Napster currently hold sway, the music labels have identified
ringtones as a key thrust area for future. The interest of music labels in the industry has
been further reinforced by the upcoming master tone segment, which promises them a
better share of the revenue. Hence, the current players in the ringtone industry face a
growing threat from their current suppliers (music labels) who plan to enter the segment.

Wireless service operators: Another looming threat facing the ringtone industry is from
its customers (wireless service operators) who are increasingly entering into direct deals
with music labels and thereby bypassing the current ringtone players. In the last year,
several mobile operators have signed deals with music labels to provide ringtones to their
customers. The interest of the wireless service operators lies in capturing a larger share
of the “ringtone pie”, primarily by cutting into the piece currently enjoyed by the ringtone
developers, aggregators and distributors.

Digital music player manufacturers: Since both the ringtone industry and digital music
player industry appeals to similar customer segments and usage profile, the long-term
convergence of mobile phones with digital music players is anticipated. However, in the
next few years, the market is unlikely to see mobile phones whose have anywhere near
the functionality of hard-drive-based digital players. Hence, the competition from this
segment is unlikely to be intense at least for the next few years, which gives the ringtone
industry enough time to prepare. Apple (iPod), the leader in hard-drive-based digital
music player industry, has already reached a landmark agreement with Motorola to
embed Motorola phones with its iTunes jukebox. However, for Apple, this agreement
primarily opens up the ringtone market for its online music download service (iTunes)
rather than a market for its music players

Online music download industry: The online music download industry, including major
players such as iTunes, Napster and Real Networks has tremendous synergy with the
ringtone industry, particularly with the emergence of master tones and similar products.
These players have already signed multiple agreements with handset manufacturers and
wireless service operators to provide mobile versions of their online music player
software, which can be used to download songs from the Internet through mobile phones.

As a result of the rapid developments in technology and the anticipated entry of several
new classes of competitors, the current players in the ringtone industry need to reinvent
themselves. Else they face the prospect of their space in the mobile entertainment
industry being encroached and finally disappear. Here we discuss the strategies that can
be adopted by ringtone companies to stay in tune with the changing times.

12
 Strategy: Strengthen relationship with wireless service
operators
M&A and consolidation is
ƒ In the past, ringtone industry players have had a strong relationship with wireless
expected to strengthen the
operators. The latter wanted to act as “gatekeepers” to the ultimate customers in
ringtone industry’s
the delivery of content. Ringtone companies were generally happy with the
competitiveness
situation as they received marketing and technology support from the operators
ƒ However, mobile operators, who currently retain 20-40% of the subscriber
revenue from the ringtone downloads are increasingly looking at garnering a
larger share of the revenues, primarily by bypassing the ringtone industry and
forging direct relationship with the music labels
ƒ The ringtone industry can stay relevant in the market place by getting better
access to content, especially for newer products such as master tones. The
rights to these are currently vested with the music labels and ringtone companies
will have to make use of alliances and acquisitions to gain access to the master
files, which will drive a large percentage of the future growth

Strategy: Retain access to content from record labels

ƒ “Content is the king” has been the oft repeated buzzword in the communication
industry for some time. The ringtone industry had been relatively untouched by
the wave during its monophonic and polyphonic era
ƒ However, with the advent of master tones and streaming music in mobile
phones, content has become a dominant theme for the ringtone industry too.
Record labels, eager to maximise revenue from the industry, is likely to be less
generous with ringtone players in licensing the master copy of their products,
which are necessary for developing master tones and streaming music
applications
ƒ Record labels have already begun cutting deals with wireless operators thus
bypassing the ringtone industry players. Moreover, even if they agree to license
the content to ringtone players, they may demand steep royalties
ƒ As a result, if ringtone companies were to stay relevant in the industry, they
would have to develop sustainable access to content (especially classic and
latest albums). Hence, ringtone players have to look at M&A opportunities to
acquire a wide repertoire of music catalogs

Strategy: Participate in the consolidation of mobile

entertainment industry
ƒ So far in its short life, the ringtone industry has been characterized by small start-
ups sprouting up to fulfill a demand that is unrecognized/underdeveloped by
larger music labels and wireless operators
ƒ However, recent developments in technology and network infrastructure have
kindled the interest of larger players in the music label, wireless operator, digital
music player and online music download industries, who now want to enter the
ringtone space
ƒ The current ringtone companies can consolidate so that they are in a better
shape to defend their turf. Moreover, the consolidation will also help the ringtone
industry in developing greater bargaining power when dealing with its larger
customers (wireless service operators)
ƒ Another consolidation strategy for ringtone companies will be to expand
horizontally by acquiring/launching mobile gaming services, which will enable
them to straddle a larger segment of the mobile entertainment platform.
Moreover, since the target segments for both the industries overlap, the ringtone
players will be able to leverage its existing brand equity
ƒ However, the horizontal expansion into mobile gaming has not become a reality
barring a few exceptions. Gaming companies such as Jamdat have already
entered the ringtone space
13
Possible M&A ideas
In this section we study several possible acquisition targets for the current players in the
ringtone industry. All the companies discussed in this section are record labels, which
hold master rights to records of popular artistes and bands. The purpose is to give a
broad overview of the candidates and their repertoire of artistes

Wind-up Entertainment (www.winduprecords.com)

Wind-Up Entertainment has artistes such as Evanescence, Creed, Drowning Pool, and
12 Stones. The company has a presence in the US and Canadian markets and reported
revenues of $100 million in 2003.

Key People
Name Title
Alan Meltzer CEO
Steve Lerner President
Edward Vetri CFO

Selected Artists: Alter Bridge, Atomship, Big Dismal, BoySetsFire, Breaking Point,
Edge Water, Finger Eleven, Scott Stapp, Seether, Strata, Submersed

Sony/ATV Music Publishing (www.sonyatv.com)

Sony/ATV is a joint venture between Sony Corporation of America and pop star Michael
Jackson. With offices in 40 countries, the company owns or administers the copyrights to
Sony BMG's catalog of compositions, including those of Columbia Records. Sony/ATV
has the largest country music catalog (Tree) and also owns more than 180 songs by the
Beatles. In 2002, Sony/ATV bought the Acuff-Rose country music catalog from Gaylord
Entertainment for $157 million.

Key People
Name Title
Paul Russell Chairman
Richard Rowe President
Frank Caveney VP Finance
Merril Wasserman VP International Acquisitions

Selected Artistes: Aerosmith, The Beatles, Leonard Cohen, Destiny's Child, Bob Dylan,
Merle Haggard, Patty Loveless, Rage Against the Machine, Babyface, Miles Davis,
Jimmy Hendrix, Roy Orbison, Sarah McLachlan

Famous Music (owned by Paramount)

Famous Music Publishing is one of the top ten music publishers in the US and has a
catalog of more than 125,000 musical works (songs, scores, cues). The entire catalog of
Famous Music is available at Syncsite (www.syncsite.com).
The company’s diversified catalog includes music from Oscar-winning motion pictures
such as The Godfather, Love Story, Titanic, Romeo and Juliet, Forrest Gump,
Braveheart, Mission Impossible, Tomb Raider, We Were Soldiers, Vanilla Sky and What
Women Want, as well as such classic television shows as The Brady Bunch, Cheers,
Happy Days, Laverne and Shirley, Mork and Mindy, Neil Simon's, The Odd Couple and
Star Trek. Famous Music has music from artistes such as Eminem, P.O.D, RL Huggar of

14
Next, Buckcherry, Paula Colean and Blondie in its catalog. It also has a presence in the
Latin music industry through a co-publishing agreement with Santander Music.

Key Statistics:
Chairman of the Board Irwin Z Robinson
Annual Sales $3,900,000
Total Employees 45

Cherry Lane Publishing (www.cherrylane.com)

Cherry Lane Publishing, founded in 1960 by Milton Okun, is a leading global independent
music publisher. The company is headquartered in New York City and has operations in
England, France, Holland and Canada, and has a staff strength of more than 90 people.
Cherry Lane Publishing is a part of the Cherry Lane Music Group.

Cherry Lane owns several film and television credits including The Passion of the Christ,
Shrek, Shrek 2, Collateral, American Beauty, Shark Tale, Gladiator, Pokémon, Yu-Gi-
Oh!, Teenage Mutant Ninja Turtles, Ultraman, Ultimate Muscle, Kirby and Fighting
Foodons series, SmackDown!, as well as dozens of made for television movies, and
documentary programs aired on A&E, History Channel and Discovery Channel. Cherry
Lane also owns publishing rights to hundreds of songs including numerous John Denver
hits, such as "Sunshine on My Shoulders." The company also publishes sheet music
(John Mayer, Alien Ant Farm, Weird Al Yankovick, Trisha Yearwood) and its Cherry Lane
Magazines division publishes periodicals such as Guitar.

Executive Team
Name Title
Milton T. Okun Founder
Peter W. Primont Chief Executive Officer
Aida Gurwicz President
Dan Lieblein Chief Financial Officer
Michael Connelly Vice President/General Manager

15
Appendix 1 - Ringtone companies
Zingy (www.zingy.com)
Zingy Inc. a subsidiary of For-Side.com Co Ltd., is a leading mobile media company in
the US. The company develops, aggregates and distributes mobile content direct to
consumers through Zingy.com and through a network of media companies and mobile
operator partnerships. Zingy offers ringtones, ringback tones, wallpapers, games, chat,
dating and picture services.

Partners
Partnerships with wireless operators:
AT&T Wireless, Boost Mobile, Cingular,
Nextel, Sprint PCS, Telcel and T-Mobile
Distribution partnerships: AOL, MSN
and MTV.
Rates
The rates for downloading ringtones are
$1.99 per ringtone download or a monthly
subscription of $2.99, which entitles
customers to any five ringtones or
graphics every month.

Faith West Inc. (www.faithwestinc.com)

Faith West Inc is a San Francisco-based wholly-owned subsidiary of the Japanese
corporation Faith Inc. Faith Inc. pioneered the delivery of polyphonic ringtones in Japan
through a combination of technology licensing, format development and content delivery.
Modtones polyphonic ringtones, Faith West's first commercial product, was launched in
June 2002. The company works directly with US wireless carriers to deliver polyphonic
and multimedia content using Faith technology, and has relationships with US-based
content providers as well.

Partners Rates
Verizon Wireless, Sprint, Alltel, Virgin Ringtone credit prices range from
Mobile USA, LLC $1.49-$1.99-for one download
$6.49-8.59 for five downloads
$9.99-12.49 for ten downloads

Ztango (www.ztango.com)
Company Description
Ztango is a US-based wireless messaging and multimedia solutions provider. Ztango's
products, which include inter-carrier SMS messaging, ringtones, graphics and premium
content services, are used by wireless networks that cover more than 80% of the US
wireless subscribers. Ztango's carrier-grade services empower wireless network
operators, media companies, portal managers and mobile marketing providers with
revenue-generating, innovative solutions. In October 2004, WiderThan, a South Korean
mobile entertainment company, acquired Ztango. The combined entity offers mobile
entertainment services to more than 210 million mobile subscribers globally through
partnerships with over 30 wireless network operators.

Partners Rates
Verizon Wireless, AT&T Wireless, Cellular $1.99 per download - AT&T
One, Cingular, Cincinnati Bell, Sprint,
SunCom, T-Mobile, USCellular, Virgin
Mobile and BellSouth International.

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Appendix 2 - Mobile gaming companies
Jamdat (www.jamdatmobile.com)
Jamdat Mobile Inc. is a global publisher of wireless entertainment applications, primarily
mobile games. It also provides ring tones, wallpapers, screensavers and other
entertainment content. Jamdat Mobile has developed a diversified portfolio of more than
70 applications to a broad range of wireless subscribers. The company publishes original
entertainment for wireless platforms such as PDAs and pocket PC’s and also licenses
branded applications from third parties.

Key Statistics
Market Cap (intraday): $632.12 million
Employees (last reported): 158
Sales $24.78 million
Gross profit $11.47million
Income (Loss) $(1.6) million

Partners
Carrier Partners: US Cellular, Verizon, Vodafone, Alltel, AT&T Wireless, Bell Mobility,
Cingular, Jamba!, LG Telecom, Maxis, Orange, O2, Nextel, SK Telecom, Sprint, Starhub,
Telefonica, Telus Mobility, T-Mobile, Cellular One, KTF, Midwest Wireless, TIM

Mforma (www.mforma.com)
Mforma is a publisher and distributor of wireless entertainment content. The company
has operations in the US, Europe, Asia and South America. Worldwide, Mforma provides
interactive mobile entertainment content and delivery technology to more than 100
wireless operators. The company’s range of products and services include Games,
Information, sports & lifestyle Services, brand management, distribution, porting and
platform management. In 2003, Mforma had annual sales of $445,000 and employed 45
people.

Key Customers
AT&T Wireless, Cingular, Nextel, Sprint PCS, T-Mobile, Verizon Wireless, Bell Mobility,
Telefonica, Vodafone, VIVO, 3, Mobilkom Austria, Mobistar, O2, Orange, Radiolinja, T-
Mobile Group, Vodafone, Westel, Wind, China Mobile, China Unicom, Globe Telecom
Key Media Partners
Atari Interactive, CBS SportsLine, Viacom Consumer Products, Universal Studios
Consumer Products, Activision, Marvel Entertainment, King Features, Sergei Fedorov,
Barry Bonds, Bill Parcells, Susan Miller Omni Media, Bethesda Softworks/Vir2L,
Tecmo Inc., Taito Corp.

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Appendix 3 - Media/Music companies
Apple (iTunes) (www.apple.com/itunes/)
Apple, the maker of the iPod, will create a new version of the iTunes music player that
will be installed on some Motorola phones. The two companies announced that iTunes
would go mobile on Motorola's "mass-market music phones" in the first half of 2005.
Motorola had touted its deals with MTV in the past, but linking its brand to Apple's iTunes
should establish it as the mobile music leader.
IPod and iTunes growth
Since their emergence in 2001, Apple has sold 3.72 million of the players, including
860,000 in Q3 2004. In October 2004, Apple announced that around 150 million songs
had been downloaded from its iTunes Music Store. Weekly downloads have been
hovering at around 4 mln.

Sony Music (wireless.sonymusic.com)

Sony Music Mobile provides interactive mobile Java applications that allow users to view
the latest music news and pictures on their mobile phones. Sony Music Entertainment
also offers a variety of downloadable ringers created by the Sony Music Mobile Products
Group, including animated polyphonic tones, actual clips from songs and specialized
sound and voice recordings. Sony Music Mobile Products Group last fall acquired
Runtones, a wireless entertainment and technology company, which recently announced
a deal to embed ring tones on Sony Ericsson phones sold in the US, Canada, and Latin
America. Sony Music Entertainment and Bertelsmann’s BMG completed the creation of
Sony BMG Music Entertainment, a global recorded music joint venture on August 5,
2004. The newly merged company does not include the music publishing and CD
distribution and manufacturing businesses of Sony and Bertelsmann.
Music groups and artistes in Sony Music’s portfolio include Destiny’s Child, Travis, Train,
Jessica Simpson and Duran Duran among many others.

Partners Rates
AT&T Wireless, Cingular, SprintPCS, $7.49 - five use purchase
T Mobile, Verizon Wireless, Vodafone $12.49 - ten use purchase
$1.99 - one use purchase

Warner Music (www.wmg.com)

Warner Music Group, is the world's largest privately held independent music company.
The company is home to a collection of the best-known record labels in the music
industry including Atlantic, Elektra, Lava, Maverick, Nonesuch, Reprise, Rhino, Sire,
Warner Bros. and Word. Warner Music Group also includes Warner/Chappell Music, one
of the leading music publishers, with a catalog of more than one million copyrights
worldwide. The company also offers a selection of polyphonic, monophonic, voice and
real music ringtones through Warner Mobile Music. The company has partnerships with
AT&T and Cingular with regard to its mobile music business.

Partners Rates
AT&T Wireless AT&T Wireless is pricing
the service at $1 a song

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Peer Music Publishing (www.peermusic.com)
Founded by Ralph S. Peer in 1925, Peer Music is a major independent publisher. The
company holds a 300,000 song-title catalog, with presence in 27 countries through 32
offices with more than 200 employees.
Peer Music’s collection of Latin music works includes: Perfidia, Besame Mucho - Brasil -
Mas Que Nada and Bahía and Mambo #5. Elvis Presley, Buddy Holly, Jerry Lee Lewis,
Frank Sinatra, Dean Martin, Nat King Cole and Bing Crosby are some of the many artists
who have recorded for Peer Music.
Peer Music also has a presence in popular TV series and movies, including: Sex and the
City, The Simpsons, The Sopranos and Friends.

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