Ringtones

People actually spend money on ringtones.  I've heard of prices around $4 for a 30 second sample, and in my informal research I just saw $2.50 for a 15 second sample.  As a comparison, the going rate for online music is 99 cents for an entire song, which average approximately 3-5 minutes in length.

The ringtone market is clearly a racket.

Apple is rumored to be working on their own ringtone store for their iPhone.  I've been thinking about what it will look like, based on rumors and also how Apple has addressed these sorts of experiences in the past.

Option #1:  The Status Quo (0% likely)
Apple could sell ringtones for $2.50 like everyone else.  They'd use the iTunes Music Store, it would be cost-competitive with other services, but have an ease-of-use advantage.  Apple would make money, but miss an opportunity to offer a compelling experience.

Option #2:  Killing the Ringtone Market (25% likely)
In this scenario, Apple says that any song in iTunes can be turned into a ringtone.  (maybe with basic cropping/editing functionality)  It would be free, and the entire ringtone market would look as overpriced as it is.  Apple would be leaving money on the table in the short term in order to make a better experience and sell more hardware.

Option #3:  Cheap Ringtones, AAC Only (70% likely)
The current rumors claim Apple will forge a middle path between both options.  They're not going to let you move any old song over to your iPhone for free, but they're also not going to charge $2.50 for the privilege.   I could see them offering a single download for $1.29 that would contain the actual song (for your iPod) with the ability to use it as a ringtone (for your iPhone).

It's still a bummer to have to pay an extra 30 cents just to "ringtonize" a track, and it would be a real bummer to not be able to convert any song you want.  But on the plus side, you would get the actual track and it would be cheaper than the current ringtone-only solutions on the market.

Option #4:  Cheap Ringtones or Your Own Songs for Free (50% likely)
The rumors could be wrong, of course.  I wouldn't be surprised at all if Apple decides to offer cheap ringtones or the ability to ringtonize any song your iTunes library for free.  After all, Steve Jobs pointed out the average iPod has about 20 songs from the iTunes store.  Allowing users to shoot any track from iTunes to their iPhone ringtones would generate a lot of positive buzz.  The kind of buzz that translates into more iPhone sales, which is all Apple really cares about.