A recent downgrade of VeriSign ( VRSN) based on poor performance from its ring tone division seems to signal that the trendy sector is clamming up faster than expected. But not according to industry analysts, who remain bullish on the phenomenon that centers on teens' interest in personalizing phones with song snippets and other novelty sounds. While cell phone carriers such as Verizon Wireless -- a joint venture between Verizon ( VZ) and Vodafone ( VOD) -- and Sprint Nextel ( S) are still reaping the spoils of the ring tone fad, the stand-alone sites -- such as VeriSign's Jamba/Jamster --- have perhaps neared the top of their growth potential, and as a result, the company is hitting a sour note with some analysts. "Dropping Jamba/Jamster would boost the company's fortunes. No matter what the means (divestiture, spinout, shutdown, etc.), we believe getting out of the ring tone business would be a positive move and we would reconsider our stock opinion," wrote American Technology Research analyst Albert Lin in a recent note. "Boot Jamba/Jamster or boot the stock is our bottom-line assessment." American Technology Research does not have a financial relationship with VeriSign. Lin downgraded VeriSign from hold to sell, and the stock slipped 3.8% on Monday and Tuesday before closing up by 15 cents to $23.81 on Wednesday. Vernon Irvin, head of VeriSign's communications services unit, sees ring tones as part of a much larger mobile media market as more users flock to features such as video ring tones and song downloads and says the company has "not engaged in any discussions" to sell the unit, which it acquired in 2004. But other analysts have expressed reservations about Jamba/Jamster's prospects. In a Wednesday research note, Jeffries & Company analyst Katherine Egbert rated the company hold with a $24 price target because of the "uncertainty around Jamba. It is difficult to know how fast or how far this business declines in 2006."
Last year, the company's Crazy Frog ring tone was wildly popular in the U.K. and parts of Europe, and it was the first ring tone to top the U.K. singles chart. It hasn't had the same success in the U.S. "Assisted by the
Crazy Frog ring tone, Jamba accounted for 32 % of VeriSign's total revenue in 2005," Egbert wrote. "The Frog fad is now largely over in Europe, and we think it's unlikely that the company will be able to repeat -- through export or otherwise -- the success of the Frog in the near future." Egbert is not compensated by the company. Egbert modeled a 42% year-over-year decline in Jamba revenue for the current year. Goldman Sachs analyst Rick Sherlund rates VeriSign "in line/attractive" but notes that the stock price is "still driven to a large degree by the company's currently lackluster mobile content business" in a Feb. 21 report about the security software market. Goldman Sachs does and seeks to do business with the companies it covers. In his downgrade, Lin also painted a harsh portrait of the ring tone market as a whole. He noted the prevalence of technologies that make it easy to convert users' own music or "rip" ring tones from content provider samples for free -- and a predominantly young market of consumers who know how to use those technologies. "If it can be heard or sampled, it will be subject to being ripped easily," Lin wrote. "The market will continue to explode in usage, just not in revenue." But industry analysts don't see the same dire scenario. Ring tone sales are neck and neck with digital download sales for 2005, according to David Card, an analyst with Jupiter Research. The company predicted revenue of about $550 million for music downloads (though Card says it will likely be a bit higher) and $600 million for ring tones. Ring tone sales will grow to nearly $900 million in 2010, about 6% of consumer music spending.
"We're pretty bullish on the growth of both categories," Card said. "They're both fast-growing, healthy segments." Yankee Group analyst Linda Barrabee agreed. After text messaging, ring tones continue to be one of the most popular applications on mobile phones. "It's about self-expression and it's about making a statement," Barrabee said. Still, while ring tones might differentiate mobile phone users, there isn't a lot of content to differentiate the ring tone vendors themselves. A Madonna ring tone is the same no matter who is selling it. VeriSign's Irvin says Jamba provided the company with a valuable platform not only for selling cell-phone "wallpaper" and video ring tones to consumers but, more importantly, for providing wireless telcos with a media download system that can be offered under the carrier's own brand. The only problem is that in markets such as the U.S., telcos such as Sprint and Verizon Wireless have already developed their own media download sites, say observers. "There's a lot of people that have the same content," said Jupiter analyst Julie Ask. Where a person buys her ring tone depends on how easy it is to download and how easy it is to find. Still, Ask said that Jamba/Jamster is in a market that's still very young in the U.S., and the company (it's known by Jamba or Jamster in different markets) is one of the leading providers of "off-portal" (outside of the carrier) ring tones. She's not concerned that people ripping off ring tones will kill the market, because ring tones are convenient, easy and cheap. It's an impulse purchase. Nevertheless, "You can have a healthy ring tone market and still have a challenge for the middleman -- the middleman can get squeezed," Card said. "Labels want revenue and carriers want revenue. There might not be much left over for the middleman." "The reality is that screen real estate
on a mobile phone is pretty valuable," he added.