Ringtone Pirates

By Laura A. Locke / San Francisco

Teens aren't inclined to pay for stuff they can get free--especially off the Internet. "We're too cheap," says a 17-year-old Redwood City, Calif., high school student. Thanks to such post-Napster sites as BitTorrent and Soulseek that offer free peer-to-peer file sharing, the teenager and her friends don't have to buy music, movies, games and TV shows online. Getting away with illegal downloading to cell phones is so easy that mobile piracy is denting the $4 billion mobile-content business. Ringtone shoplifting is one of the costliest abuses, accounting for an estimated $40 million in lost revenue since 2004. An additional $123 million could be lost by 2007, according to Qpass, a Seattle-based mobile-commerce-services company. Qpass found that, of the 100 websites tested in a study (42 mobile operators and 58 online entertainment stores), more than a third were unsecured, allowing users to steal ringtones when previewing snippets of songs.

Theft of mobile data eats into carriers' profitability too. This year network operators worldwide stand to lose more than $5.6 billion, or 18% of their total revenue, Qpass reports. The broader problem stems from the fact that about half of the telecom industry relies on outdated billing systems that were fine when charging by the minute was standard. Today back-end operations must handle a variety of complex charges, often from third parties, ranging from e-mail services to games, screensavers and other data transactions. As more consumers buy Internet-ready smart phones, and media giants like MTV, Disney, Time Warner and Fox clamor to deliver content to the "third screen," revenue leakage will only get worse. The solution? Mobile carriers need to revamp their back-end systems, ensure real-time authorization of purchases and secure their electronic storefronts. Even then, teens will probably outsmart them.