Madonna had the right idea when she sang, "Ring, ring, ring goes the telephone" in her song Hung Up. Before long, that tune could end up alerting users of Skype, the Web-based phone service, that their phones are ringing too.
Hung Up will be one of the offerings that are part of Skype's ringtones push. Skype, owned by online auctioneer eBay (EBAY), said on Apr. 25 that it will license ringtone content from music publishing companies EMI Music Publishing, Sony/ATV Music Publishing, and Warner/Chappell Music, as well as from the MCPS-PRS Alliance, which represents authors and publishers in Britain. Skype needed those agreements to distribute ringtones from Warner Music Group (WMG), with which Skype announced a licensing deal in January.
BUILDING A CATALOG. Skype, which boasts 94.6 million users worldwide, will start off by selling a handful of ringtones through its content store, personal.skype.com, on Apr. 26. The tones will sell for $1.50 each in the U.S. and for €1.50 in Europe. The company plans to quickly expand its ringtone catalog, which could eventually encompass hundreds of thousands of titles. Skype also hopes to license content from other music recording companies and publishers.
The deals mark a major expansion of Skype's ringtone efforts, which got under way last year. Until now, the personal.skype.com store has only offered a few customized, jazz ringtones. But Skype is dabbling more in music. It recently gave users an opportunity to call and leave messages for the band Coldplay. The online store's Extras for Skype section offers a dozen free music-related applications, created by independent developers with nifty capabilities such as getting the home computer to call the user via Skype and play a favorite song from the PC.
Analysts reckon ringtones may be just the first steps by Skype into a range of Internet Protocol (IP)-based entertainment services. "A natural follow-up would be gaming and video offerings," says Marianne Wolk, an analyst with Susquehanna Financial Group. "Plus, I look at full-track music downloads as a given."
MORE MUSIC? While Skype says it has no plans to compete with Apple's (AAPL) iTunes, Wolk is unconvinced. Wireless service companies used ringtones to test the waters on over-the-air entertainment services for cell phones. The test was successful and paved the way for the introduction of mobile games and video.
Last year, mobile ringtone sales exceeded $4 billion worldwide, and in 2005, U.S. carriers introduced full-track music services. Might Skype retrace these steps as it expands its entertainment services offerings? Analysts say the chances are good.
Skype has already demonstrated interest in expanding into cell phones. Already, applications from developers like iSkoot have enabled cell-phone users to make cheap calls via Skype. Skype is establishing agreements with carriers in Asia to make its application standard on their phones. As the company's wireless efforts ramp up, it will make sense for Skype to sell ringtones for cell phones. Skype might also become a player in the market for mobile video, says Jon Arnold, principal for VoIP consultancy J. Arnold & Associates.
PUSHING DOWNLOADS. Full-blown music downloads could be a huge revenue opportunity for Skype, which is expected by analysts to generate $200 million in sales this year. The digital music download market is growing fast. While today Web downloads account for only 6% of the total music market, within five to six years they will grab one-third of all music sales, says Stephanie Guza, an analyst with consultancy In-Stat.
Today, iTunes dominates the market with more than 65% share. But rivals Napster and Rhapsody are bumping up their efforts. And Internet brands such as Amazon (AMZN) and Google (GOOG) are rumored to be readying their own music download services.
Essentially, any strong Internet brand could potentially do well in selling music downloads, says Alan McGlade, CEO of MusicNet, whose technology powers MTV's music store, expected to launch soon. The outfit is in talks to provide similar capabilities to numerous other companies, he says. "There's more interest than ever, we are so busy, it's hard to keep up. You are going to see a lot of companies enter the marketplace."
CROWDED SPACES. The effort could be part of eBay's strategy to accelerate revenue growth (see BW Online, 4/20/06, "eBay: Diminished Expectations"). The auctions powerhouse has yet to figure out how to make money on Skype which, for most users, remains a free service.
Plus, Skype needs to keep up with rivals like Google, Yahoo!, (YHOO) and Microsoft's (MSFT) MSN, which have entered the Web-calling space. But unlike Skype, Yahoo! and MSN already sell full songs. They also offer lots of online games and videos.
Late last year, Google launched Google Music, designed to make searching for artists easier. Earlier this year, Google announced it would be powering search on radio stations' Web sites for Clear Channel (CCU), another sign that could mean the search giant is gearing up for a digital download service.
TEEN TONES. That said, most analysts don't expect VoIP ringtones to be as successful as wireless ringtones, the best-selling type of wireless entertainment content. Cell-phone ringtones have appealed to teenagers, but Skype and its ilk tend to attract older users, says Vamsi Sistla, an analyst with consultancy ABI Research. "Your wireless phone is a statement about you," says Tole Hart, an analyst with consultancy Gartner. "But when you are at home or work, [where most VoIP calls are made], you might not care about making a statement."
What's more, $1.50 could prove a bit pricey for Skype users. Most online download services charge only 99 cents to download a whole song. And while Skype ringtones will be cheaper than the $2.99 Verizon Wireless charges for one-time use on regular cell phones (rates go up for prepaid phones), most of Skype's VoIP customers use the service to save money, so they might not be willing to fork out more for ringtones, says Arnold (see BW Online, 3/9/06, "Skype Dials For Business Dollars").
Kharif is a reporter for BusinessWeek Online in Portland, Ore.
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