How Kids Set the (Ring) Tone

By Jyoti Thottam

When he needs to figure out what his company should be doing next, Daniel Kranzler often seeks expert advice--from his 18- year-old daughter. Kranzler's company, Mforma, makes games and ringtones for cell phones and, by staying plugged in to teens like Kat, has seen sales double every few months. He's not alone. An explosion is under way in the cell-phone business, as innovative new companies are popping up, feeding not just teen tastes but also, in the process, defining a new future for wireless communications. Kranzler inked a deal in December for Mforma with Marvel for exclusive access to its comic-book characters and is working on a next wave of cell-phone services. "My daughter lets me know what she thinks of the products--with a baseball bat," he says. "Her favorite is, 'Oh, Dad, you so don't get it.'"

Yes, in this vibrant little corner of the wireless industry, market research can be as simple as asking your children what they like. But that doesn't make the potential any less captivating. The cell-phone phenomenon reaches way beyond teenagers. There are 180 million cell-phone subscribers in the U.S. today, and we are no longer simply talking or text messaging or gaming. We are living inside our phones, even decorating them like a home, with images we call wallpaper. Meanwhile, creative companies big and small are scurrying to persuade us to use our tiny screens in ways we haven't even imagined. Fox thinks we will want to watch 24: Conspiracy, a version of its hit TV show developed just for the phone. The NBA hopes basketball fans will use their phones to get game stats, follow their fantasy leagues and watch replays. One ambitious start-up is betting that people will pay to blog via cell phone.

If all this sounds suspiciously like the hype-saturated Web circa 1999, it should. These days, tiny companies with names like Zingy and Jamdat are market leaders, and product testing often means throwing something new out to the public just to see if it flies. The world of these wireless data services is so unformed that no one knows yet what people will pay for in the long run. "The history of this space is everyone just feeling their way through," says John Burris, director of wireless data services for Sprint. But the excitement is real: companies and industry experts are convinced that cell-phone services hold great promise and are desperately trying to get into the game, hoping to catch the next wave in our growing Cell-Phone Nation.

For the moment, the market is being driven by teenagers, who have moved far beyond talking on their phones. "I text more than I talk," says Josh Blackburn, 19, of Naperville, Ill., who tries to keep his $70 monthly cell-phone bill under control by talking only after 7 p.m., when his minutes become free. But he will pay to send text messages to his friends, to IM them and to download wallpaper of Jessica Simpson. Royce Badger, 17, of Atlanta, loves his commute to school--that's when he plays racquetball on his cell phone. Erin Duffy, 17, a high school senior in Katy, Texas, lost the flashy phone that let her download ringtones and wallpaper, so, as punishment, her father saddled her with an older model that, to her mortification, allows her only to text and talk. She's saving up for a new one, with different ringtones for each of her friends: "I'll have Britney Spears for my girlfriends, and I'd have rap for my boyfriend."

Teenagers right now are "the sweet spot," says Burris of Sprint. An estimated 76% of kids ages 15 to 19 and 90% of people in their early 20s regularly use their cell phones for text messaging, ringtones and games, and that enthusiasm has turned wireless data services into a significant business. Gartner Research estimates that Americans spent $1.2 billion last year on ringtones, wallpaper and other "personalization" services and an additional $1.4 billion on cell-phone games and other entertainment. Fabrice Grinda, CEO of one of the leading ringtone companies, Zingy, says these services tap into young people's impulse to assert their individuality, as they have always done with clothes and hairstyles. And as with clothing, there's money to be made off these urges. While downloading an entire song from iTunes costs just 99-c-, Grinda's customers are willing to pay as much as $3 for a 30-sec. ringtone.

To turn wireless data services into a major source of revenue, carriers will eventually have to move beyond what works with young people. They are relying on an army of small companies to create the cutting-edge content. Many of them start-ups, those companies develop the games, ringtones, etc. and take a cut--as much as 80%--of the fees charged by the carrier for each download. Analysts expect that revenue from ringtones and gaming will eventually level off. "There are only so many ringtones and so many games they can offer," says Phillip Redman, an analyst at Gartner. So those companies are madly trying to come up with the next big thing in cell phones.

Intercasting is typical of the new breed of wireless-content companies. Its founders, Shawn Conahan and Derrick Oien, are both veterans of the digital music file-sharing wars, and they envision a world of mobile phones that bears little resemblance to what we have now. "The mobile landscape of six months ago was ringtones," Conahan says. He and his partner are convinced, however, that the possibilities are much broader. Just as peer-to-peer networks like Napster turned digital music into a global phenomenon, they believe that mobile phones have created a similar kind of untapped network. Cell phones, they argue, link each of us to a personal network of friends and family. Intercasting's service, Rabble, allows you to reach those people through mobile blogs--a combination of photos, text and eventually video--all created with a mobile phone. Imagine, for example, narrating your next vacation via cell-phone blog for all the folks back home. Or creating a real-time blog about the people you're meeting at a party--or at a business meeting.

Mforma's Kranzler is focusing on cell phones as a new venue for existing media. He guesses that his company will eventually offer a shorter version of what we already see on television and the Web. He calls this "media snacking": small bites of news or entertainment lasting from 30 seconds to four minutes. "When you're at home, you eat a full meal: an hour on the Internet and TV," Kranzler says. "On the mobile, you're snacking: two to four minutes, 15 or 20 times a day."

Grinda of Zingy made the leap into cell phones from another recent tech darling, online auctions. A native of France, Grinda sold his company Aucland, a pan-European version of eBay, to the Spanish company Terra in 2000. After watching a friend make a fortune in ringtones--a business he once thought would never be more than a novelty--Grinda got into the game himself. He started Zingy and sold it to the Japanese company For-Side.com last May, but he is still running the business and pushing the company into city guides and traffic reports.

And unlike some others, Grinda thinks there's still plenty of room for growth even within ringtones. Record labels have only recently embraced fully licensed ringtones that actually sound like music, he says, and Zingy is racing to sign up the most popular hip-hop acts to exclusive ringtone deals. (His roster already includes 50 Cent, Ludacris and Snoop Dogg.) Grinda says the only thing holding the content back is handsets: just some 15% of cell phones in use today support the best-quality ringtones. Of course, Americans typically replace their cell phones every 18 months. "Give me two years, and every handset in the U.S. will be compatible," he says.

Camera phones, on the other hand, are available on 27 million handsets, and Snapfish Mobile is trying to turn them into a business too. Cell-phone carriers have seen little in the way of revenue from the huge popularity of camera phones. Snapfish Mobile allows users to share and store camera-phone pictures--and encourages them to pay to turn them into wallpaper or order prints.

Of course, the big boys are also jumping into wireless services. Larry Shapiro, who runs Disney's North American mobile business, first realized the potential in cell phones in 2000, in Japan, where high-speed networks allowed cell-phone content to take off long before it did in the U.S. (Disney characters are enormously popular there, particularly with young women in their 20s and 30s--heavy users of cell phones.) In the U.S., Disney's games and wallpaper images of characters like the Incredibles have done well, but the company is still trying to figure out how to translate its movies and television shows to the mobile-phone environment. "Having a wireless strategy will have to be a part of any brand strategy," says Clint Wheelock, an analyst with NPD Group. "What they're all struggling with right now is to figure out what the business model should be." Shapiro admits that finding the right form for wireless keeps him up at night, but Disney is committed to figuring it out. "We think it has the potential to be a significant revenue stream," he says.

One of the most enthusiastic entrants into mobile content isn't a media company at all. The NBA has made mobile phones a key part of its marketing strategy by offering fantasy leagues, team wallpaper, game stats and video highlights for mobile phones. With network-television audiences shrinking and cable-TV viewers so dispersed, mobile phones present a unique opportunity for the league to reach its fans through the one line they always have open. Later this year, Apple plans to shake up that industry even further. The company that transformed digital music is jointly developing a cell phone with Motorola. Called the Rokr, it will merge the iPod with a mobile phone in what could potentially be a huge new market for both digital music and cell phones--that is, if the phone venture can find a carrier willing to enter the uncharted territory of music via phone.

To handle all this sophisticated video and music content, the big carriers are making massive investments in their networks. Sprint is pouring $1 billion into an upgrade this year, and Verizon is rolling out its high-speed data services network. At least for now, they will be the gatekeepers (Sprint has taken a stand against cell-phone porn, a big business overseas). Meanwhile at least one carrier is already bypassing the small companies for cell-phone services: Verizon is relying on household names like CNN and NBC (for news) and Comedy Central and VH1 (for entertainment) to attract users to its new VCast service.

What's the bottom line? Wireless companies like Jamdat and Infospace are getting panting attention from venture capitalists convinced that cell-phone services are their newest gold mine. Wall Street has started to grill every consumer company about its wireless strategy. But this hypefest isn't quite like the dotcom delusion. "This started with a business model," notes Disney's Shapiro. "We're being prudent."

That's good news for investors, but it may also mean that the cell-phone-services industry will turn corporate before you know it. As long as companies are trying to figure out what works by flying the next big idea past a bunch of teenagers, they may take chances on some zany concepts. But once the commercial winners are clear, more outlandish forms of content may fade away. Spam and advertising will creep in too. That makes now an ideal time for all of us to enjoy the wacky creation of a new industry. Your teenager's cell-phone habit might be driving you crazy, but it's jolting the tech world with a hit of much needed creative chaos. --With reporting by John Hollis/ Atlanta, Coco Masters/New York, Adam Pitluk/ Houston and Leslie Whitaker/Chicago

With reporting by John Hollis/ Atlanta, Coco Masters/New York, Adam Pitluk/ Houston, Leslie Whitaker/Chicago