As the wireless industry moves from polyphonic ring tones to ring tones using actual master recordings, observers say artists should be aware of how labels will treat the use of the master recording.

WASHINGTON--As the wireless industry moves from polyphonic ring tones to ring tones using actual master recordings, observers say artists should be aware of how labels will treat the use of the master recording.

The next generation of ring tones, known as ring tunes, or master tones, are actual copies of the master recordings, and in many ways are comparable to the digital downloads being sold by retailers such as iTunes or Napster 2.0.

Users will be able to download tracks for use on their cell phones as ringers, which can be played on-demand. Wireless companies and record labels may offer these downloads as excerpts of the songs or as full-length tracks.

This new revenue source raises the issue of how artists will be compensated. In a traditional recording contract, the artist's share of ring tone revenues could potentially be paid under two different clauses, depending on the type of sale and the record label's treatment of that sale.

First, ring tone rights could be treated as a license to a third party. The current polyphonic tunes fall within this category, and commonly pay the artist 50% of label revenues from ring tone licensing agreements.

The issue becomes more complicated when the ring tone is actually from a master recording. If the agreement provides for a 30-second clip, it could still be considered a licensing agreement because it is not a download of the entire product but a portion used for a specific circumstance by a third party.

When the entire song is sold, the record label may construe the transfer as a sale of a digital download by a new distributor, i.e., the wireless carrier, not as a third party license.

As a classic sale, the artist would be owed only his royalty percentage of retail or wholesale price, a percentage significantly lower than the 50% owed on third party licenses.

Attorneys and managers should be aware of this when negotiating recording contracts. If the language of the contract is not clear in its treatment of ring tones using master recordings, the label may likely treat such ring tunes as traditional sales. As traditional sales, the artist would not be entitled monies that would be entitled to in polyphonic ring tone licensing agreements.