Ringtones are a big business--one estimate puts ringtone revenue at about 10 percent of the entire global music market--but I don't think the party is going to last.
One obvious problem with ringtones is their high price. Why is a ringtone, which costs an average of $2.50, so much more than what iTunes charges for a full-length high-quality song? Research from the NPD Group says there is no conflict here: current ringtone buyers are willing to pay up to $3.25 per track and potential buyers will pay up to $1.75. Those numbers may well be accurate, but they aren't going to last thanks to two closely related trends.
First, carriers (especially US carriers) are going to realize that they can't maintain complete control over all mobile services. Just as AT&T no longer owns my landline phone, Verizon will no longer be able to get away with blocking MP3 playback and hobbling Bluetooth on my cell phone. Users are going to start demanding that their phones come with USB cables and handset manufacturers will be more than happy to comply. Forget about the "walled garden"; if carriers want to compete in the ringtone market, they're going to have to cut prices and improve service, just like everyone else. Once consumers have MP3 capable phones and cables that sync with their desktop there's no way they are going to buy an MP3 they already own on their desktop a second time at a 150 percent markup just to be able to set it as a ringtone. I expect to see an iTunes (or Windows Media Player) feature that allows users to convert any purchased song into a ringtone. Users would probably even be willing to pay for this feature, say $0.10 or so per song.
The second trend is inevitable proliferation of cheap, high-speed mobile data. Smartphones are going to be viewed as an extension of the desktop Internet experience and users are going to expect to be able to access many of the same services (like Google search or Yahoo! Mail) for the same price (free or cheap).
People are already starting to wise up. Just take a look at what happened to Jamba, the infamous vendor of the Crazy Frog ringtone. According to The Times, Jamba is facing angry regulators and consumer backlash thanks to the misleading way it sold its ringtones. -Eli