With the market for downloadable over-the-air content flat, operators and music companies are looking to other ways of making money from mobiles, says Adam Webb

Although Apple's iPhone is only released in the US tomorrow, its ringtone has been available for download for months, picked up by alert listeners to Steve Jobs's demo in San Francisco in January. Being a MIDI sequence, it's free. Free ringtones? It's enough to put a shudder through the music and mobile businesses.

Yet they might have good reason to worry. One of the many anomalies of the mobile music market is that, while a full track bought directly from a network will cost between £1 and £1.50, a 20- second snippet from the same original can be priced at up to three times as much. Globally, this has created a multi-billion-pound business.

In 2005, German-based content provider Jamba! reportedly amassed profits of $600m (£300m) on the back of its Crazy Frog ringtone. Meanwhile, cumulative "realtone" (music tone) sales for R&B artist Akon recently surpassed the 11m mark, greater than either of his two albums. Realtones generate royalties for record labels (though monophonic and polyphonic tones, or those from animated amphibians, do not), creating an unexpected silver lining for the music business which is stuck in a generally rather black digital cloud.

Lucrative purchases

But if the iPhone and the majority of next-generation handsets is anything to go by, the future of mobile entertainment lies in "sideloading" - transferring existing content, such as music, from a PC, as opposed to the more lucrative (for operators) process of purchasing products over the air.

"I think the ringtone business is in peril now because the operators have allowed into the market mobile phones which can sideload MP3s and use them as ringtones," says Andrew Bud, executive chairman of mBlox and vice-chairman of the Mobile Entertainment Forum.

With nobody able to explain convincingly just why consumers continue to pay a premium for a novelty product, the ringtone industry is something of a gravity-defying act anyway. One analyst goes so far as to describe ringtones as "digital jewellery", with most concluding that their value is a combination of personalisation and convenience.

According to the digital music business research consultancy Music Ally, the retail value of the UK's music ringtone market this year will be between £100 and 120m, compared to £30m for full track mobile downloads. With networks taking a slice of between 40% and 50% from each transaction, this looks slightly less impressive from the music industry's perspective. But a BPI press release earlier this month (tinyurl.com/2epp8w) quotes research by Informa Telecoms & Media that the western European realtone market is set to increase this year by 56%. Surely things can only get better?

However, Informa's analysts were unavailable to explain their calculations. And certainly sideloading (along with excessive data charges and poor user experience) is one of three significant roadblocks to bigger sales.

Sideloading highlights some of the mobile market's inherent contradictions. The facility is essential for handset manufacturers such as Nokia and Ericsson, which are in effect competing head-to-head with Apple in the MP3 player market. But that is not necessarily in the vested interest of the networks that want consumers to buy content over the air, preferably within their walled garden.

Meanwhile, music-enabled handsets able to store hundreds of tracks are increasingly commonplace - the BPI release notes that 40% of UK phones can play music files - and if the example of the iPod is anything to go by, the majority of these will be ripped from CD collections. Notably, the current specification for Apple's iPhone has no 3G capabilities, and is custom-built for sideloading. If converting those tracks into a user-generated ringer is similarly straightforward (as it is on popular models such as Sony Ericsson's Walkman range) and costs nothing, then the days of the £3 ringtone look numbered.

Mobile measurement company M:Metrics claims that 12% of UK mobile users are already sideloading their music collections, compared to 2.5% who buy tracks over the air. Countering Informa's predictions, they also suggest that the realtone market is, at best, flat, with 1.1 million UK consumers buying one or more ringtones in April, compared to 1.35 million in September last year.

Anecdotally, record labels agree. Last year, Rob Wells of Universal Music Group International claimed that the UK ringtone market was in terminal decline.

Whether sideloading will sound its death knell is another matter. Nobody within the mobile business anticipated the demand for either ringtones or text messages in the first place, indicating the market's unpredictability, says Music Ally's Steve Mayall. And since the industry is rife with unrealistic predictions and hype, that makes it incredibly difficult to assess. "Somebody said yesterday [at Monaco's Mobile Entertainment Market conference] that mobile content is a $40bn industry, but it's not," says Mayall.

"It's not even half that. It's not bigger than the entire music or film industry, and that kind of hyperbole is in danger of hurting the whole business. The reason that ringtones have been so popular is simply the convenience factor - and that isn't going away. That ability to make an instant purchase is still there, and businesses can still make a decent amount of money from ringtones."

Bundled future

But the fact remains that some fundamental changes will be necessary if this digital jewellery is to retain its allure. Seth Jackson, MD of marketing and distribution company Indie Mobile, says the future will most likely be a bundle (where, for a couple of quid, you'll get a full track, a ringtone and a video).

Elsewhere, innovative products are being introduced: EMI, for instance, has just unveiled a remixable realtone for the hip hop artist MIMS, while independent labels such as Ninja Tune are using them as freebie promotional tools.

What is certain is that prices cannot remain static. And as with moves to incorporate VoIP services and flat-rate data charges, it is innovation that will move the market forward, rather than the protection of any perceived golden goose.

"You can look at something like sideloading in two ways," Mayall says. "You can either say this is bad for the business as they're not getting money from OTA [over-the-air] downloads or ringtones, or you could say that it's encouraging people to think of their phone in a different way, and as a potential music player. Once you've got that notion established then you can build business models off the back of it. And that's really the way they're going to have to go."

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