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The next digital battle: Ring tones

Industry insiders estimate that up to 65 percent of all ring-tone companies aren't licensed, a fact many ignored--until now.

The same forces that took on file-swapping companies Napster and are quietly setting their sights on what some regard as the next digital copyright battle: selling ring tones for cell phones.

Selling ring tones is big business in Europe and Asia, where hundreds of companies offer snippets of popular music to replace the prepackaged tones used to alert someone to a call. More than $300 million in ring tones were sold in Japan last year. Nokia estimates it will make billions selling ring tones by the end of 2005.

But the industry is still relatively unregulated. Several industry insiders estimated that up to 65 percent of all ring-tone companies aren't properly licensed. With most of the business taking place in Europe, American licensing agencies like the Harry Fox Agency or the American Society of Composers, Artists and Publishers (ASCAP) weren't doing much about it--until now.

"What happens is that people begin to exploit music," said Gary Churgin, Harry Fox Agency chief executive. "There are others who build their business and look at licensing after the fact. Whether it's Napster or ring tones, we still monitor the market."

Ordering a ring tone is a relatively new phenomenon for Americans, but old hat in Europe. After people select which ring tone they'd like from the ring-tone company's Web site, they can call or e-mail the company to have it downloaded to their phone. Each download costs anywhere from $1 to $10. The charges show up on the customers' phone bill, and the profit is shared between their phone service provider and the ring-tone company.

The ring-tone business is about to explode for agencies handling the rights for 80 percent of the music in the world. Just this week, Motorola said it was partnering with Ztango to sell downloadable ring tones. Ztango, a licensed ring-tone seller, will be powering the download service to Motorola phones. The download service will begin first in Italy for customers of Italian wireless carrier Telecom Italia.

A slew of major European ring-tone sellers such as Monstermob are about to test the American waters. It's expected that by the middle of next year, every U.S. carrier will be selling ring tones.

Now the agencies that have been waging a war with Napster over music swapping on the Internet are focusing on ring tones. ASCAP, which sells the performance rights for hundreds of thousands of popular songs, has begun trying to weed out ring-tone sellers working without ASCAP approvals, said Chris Amenita, an ASCAP senior vice president.

The Harry Fox Agency, which handles the licensing for the National Music Publishers Association and its 27,000 members, is now licensing its tunes for ring tones. So far, the agency said, it's received 30 applications.

Several ring-tone companies that are not licensed by any of the major agencies would not comment for this story.

Amenita said ASCAP officials are "going through a (long) list" of ring-tone companies. While it is difficult to estimate just how many companies sell ring tones, there are at least 1,200 in the United Kingdom alone. Amenita said ASCAP has so far issued licenses to 10 different ring-tone companies, with 10 applications awaiting approval.

"We're looking at all the companies coming onboard right now," he said. "And we're looking at those we're already in discussions with, and those we are being made aware of. Reactions have varied. Some were waiting to see if they would be contacted, others weren't quite familiar with what ASCAP does."

Broadcast Music Incorporated, or BMI, licenses public performance rights for 4.5 million songs. BMI Vice President Richard Conlon said he's noticed a new emphasis on making licensing decisions just in the past 90 days as the industry shifts to North America. In the past week, BMI issued a license to New York-based Zingy, a wireless entertainment portal that sells ring tones.

"I hope they work out better than peer-to-peer," said Conlon, making a reference to Napster and the bitter copyright battles over Internet-based file swapping.

There has been just one lawsuit so far against a ring-tone seller. Record label EMI sued YourMobile, a ring-tone seller and wireless advertising firm based in Santa Monica, Calif. The case has since been settled, and Chief Operating Officer Bryan Biniak said YourMobile has received licenses from EMI, plus three other major publishing representatives. A fifth is expected soon.

"This is a potentially enormous marketplace," Biniak said. "We don't want the industry to end up like the Napster space."

International complications
The number of licenses that a ring-tone company must have varies throughout the globe. In Europe, ring-tone sellers generally have to get just one license from a music publisher. That license covers all the songs in a publisher's catalog. If the publisher is located in a country that is part of the European Union, the company can then sell ring tones anywhere on the continent.

But in the United States, companies have to pay for mechanical rights, or the right to reproduce the music in a ring tone, and performance rights, or the right to play the music. Rights are generally purchased through the individual publishers, but many rely on groups like the Harry Fox Agency to do their work.

Questions remain about whether or not a ring tone can be considered a performance. Some say yes, but others say 15 seconds or less of a song generated by a cell phone should not be considered a performance.

The rights agencies themselves aren't close to settling on a position. For example, BMI just released a rider in its ring-tone contracts, which will let the company, retroactively, cull 2 percent of the revenues for performance rights if the ring tones are indeed determined to fall in that category.

Companies are also claiming that the licenses they receive from European rights groups, such as Bumastemra in Holland, are good anywhere in the world. But ASCAP and the Harry Fox Agency insist that isn't true.

Some ring-tone companies say the location of the servers sending the ring tones is key to what kind of rights they must have--whether it's the relatively easy European variety or the United States variety.

"As operators are looking to get into this space in the United States, the big names want to ensure that they are working with an above-the-board company," said Paul Hughes, who heads the U.S. operations for Sonera Zed, a wireless content arm of Finnish phone giant Sonera, which announced last week that it has received ASCAP approval. "But what we're seeing in the industry is presenting problems and opening eyes."