Ringtones’ requiem

January 18, 2010, 1:30 PM UTC

Customized cellphone rings are so 2004. But the music industry has a new source of revenue – it’s all about the ringback tone.

Remember the ringtone? Just two years ago consumers were spending $1 billion a year on song snippets for their cellphones. Established musical acts recorded ringtone versions of their songs, and some composers set out to write tunes that had hooks and melodies that would lend themselves to tones. (Think: 50 Cent’s “In da Club.”) Then came text messaging. And smartphones. And mobile apps.

U.S. ringtone revenue this year will reach about $750 million, down from $881 million in 2007 — and the business will be nonexistent in 2016, says IBIS World, a consumer analyst group. A big reason consumers are eschewing personalized ringtones? Cellphones simply don’t ring as much as they used to.

“People used to talk on their cellphones,” says Frank Dickson, vice president of research at technology analyst group In-Stat. “We’ve become a text-centric society, which takes away from talking, which takes away from ringtones.”In the past two years the average number of text messages sent by each U.S. cellphone user has more than doubled, to 584 texts per month from 218 per month. In that same period the average number of calls has decreased almost 15%.

There also seems to be a growing sentiment that personalized ringtones are a bit, well, cheesy. (It’s bad form to let your phone go off during a client meeting, but it’s really embarrassing if that ring happens to be an instrumental version of Bon Jovi’s “Livin’ on a Prayer.”) Instead, many users are dressing up their smartphones with downloadable applications that reflect their tastes and personalities.

But the music industry, which reaped great rewards charging $3 for 15 seconds of content, still hopes to milk the mobile market for revenue even as ringtones fade. The ringback tone (a song that plays for inbound callers instead of a ringing signal) has seen tremendous growth. Ringback revenue has more than doubled since 2005, and it brought in almost $200 million for music labels last year, according to analyst group SNL Kagan.

Music executives think ringbacks eventually could outsell ringtones. Ringback tones are popular outside the U.S., and because ringback tones are delivered over the phone network, the music is harder to pirate than ringtones, which can be illegally downloaded onto devices. And Bon Jovi fans can still personalize their phones with the band’s music — just more discreetly.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.