Vringo Bets on Video Ringtones

The startup proposes video sharing on mobile handsetsalready, Universal Music Group is on board

The idea for his new startup came to Jon Medved two years ago at London's Heathrow Airport when he was trying to reach the Hertz (HTZ) call center. While waiting on hold, the Israeli venture capitalist was forced to listen to audio ads from Hertz about the various cars available. It suddenly struck Medved that it would be far more effective for Hertz to serve up images or even videos of cars.

Thus was born the idea behind Vringo, a startup launched last year by Medved and David Goldfarb, a leading Israeli mobile software expert. The idea is to capitalize on the popularity of social networks and digital video, marrying them with the phenomenon of downloadable audio ringtones—a business that already racks up $6 billion in annual revenues for mobile operators and content owners worldwide. Medved describes Vringo as a "sort of ICQ [instant messaging] combined with a personalized YouTube (GOOG) on your cell phone."

With conventional audio ringtones, customers download a short music clip—say, the theme to Hawaii Five-O—onto their own phones. Whenever somebody calls, the song plays instead of a regular ring. Aside from some possibly annoyed people in the vicinity, the only person who enjoys it is the owner of the phone.

Vringo Defined

Vringo's video ringtones turn that model on its ear. To use the service, customers join the Vringo community for free and install a small piece of software onto their phones. Then, when one Vringo member calls another, instead of a ringtone, the recipient of the call is treated to a video clip chosen (and paid for) by the sender. Every call thus becomes an opportunity to share content and to establish identity—the wireless equivalent of the "hey, dude, check out this YouTube video" culture of the Internet.

If it catches on, Vringo has the potential to be about far more than just sharing clips, though. Advertisers are intrigued by the idea of using mobile phones to pitch their products; Vringo offers the possibility of adding viral marketing to the mix—essentially, having enthusiastic consumers spread the word for you. What's in it for Vringo users? Instead of paying for a clip, a caller might get five minutes of free talk time for sending his buddies copies of a new ad.

Such opportunities already have attracted the interest of investors. On July 31, Vringo announced that it had raised $12 million in funding from New York-based private equity firm Warburg Pincus, which it will use to launch video ringtones this year and next. "Vringo is uniquely positioned to shape and ride the second wave of mobile personalization," says Warburg Pincus principal George Allen, who has also joined the company's board, in a statement.

Teaming Up

Running his own show is a switch for Medved, 51, who worked for a decade as a venture capitalist. He was the founder and co-manager of Israel Seed Partners, a Jerusalem-based firm that raised $262 million in four funds. Among its biggest success stories: Shopping.com, acquired by eBay (EBAY); Cyota, acquired by RSA Security (EMC); Xacct, acquired by Amdocs (DOX); and Compugen (CGEN).

After his Heathrow revelation, Medved went to see Goldfarb, an MIT graduate and veteran of the vibrant Israeli tech scene, to find out whether his idea for video ringtones would work. The biggest constraint was that most phones are designed to stop playing video if an incoming call interrupts. In Vringo's case, Medved wanted the video to be the interruption.

A six-member team led by Goldfarb designed a solution in about 18 months at the startup's headquarters in Bet Shemesh. The patented software rides on top of the handset's own code, springing to life whenever a call comes in. At present only about 10% of all handsets are capable of supporting Vringo's software. But Medved predicts that by the end of next year about half of all phones manufactured by Nokia (NOK), Motorola (MOT), Sony Ericsson (SNE, ERIC), and Samsung (SSNGY) will be compatible.

Video in Vogue

Will videos shared via mobile phones be the next big fad? Already, companies such as Jamster (VRSN) offer video ringtones that work pretty much like conventional audio offerings. And Vringo is not alone in pursuing the idea of video sharing: Mobile software provider NMS Communications (NMSS) of Framingham, Mass., includes support for mobile video sharing in its MyCommunity suite. But Ira Brodsky, president of St. Louis-based consultancy Datacomm Research says Vringo has a head start over competitors. "The mobile market is increasingly going for enhanced and personalized services like video ringtones," he adds.

In a vote of confidence for Vringo, Universal Music Group, the world's largest music company, announced a deal with the company on July 10 that will permit Vringo users to produce their own video ringtones from Universal's video collection. "This will make our artists available to an even wider and more connected worldwide audience through this service," predicts Rob Well, senior vice-president for digital at Universal Music Group. Vringo is conducting trials on its technology in the U.S. and Europe with some of the leading mobile-phone operators.

A "Personal Advertising Agency"

The startup is also pursuing opportunities in mobile marketing, holding talks with several unnamed consumer-products giants about using its network of members for advertising. If that pans out, Vringo's technology would, in effect, turn the cell phone into what pundits are calling a "personal advertising agency." Mobile operators could harvest revenues from distributing ads to customers, while mobile users would likely get something in return for viewing ads—whether points, discounts, or even free service.

For now, clips available for Vringo are free, but the company plans to go into commercial mode and start collecting revenues in 2008. Prices for the video clips haven't been revealed, but will be set by mobile operators or the owners of the content.

It will likely take some time for a critical mass of users to emerge, but Vringo is counting on its members to spread the word to their buddies. Audio ringtones became a multibillion-dollar cash cow in less than a decade. Medved is hoping that history will repeat itself.