Apple is in talks with major music labels to beef up its ringtones and offer over-the-air music downloads on its upcoming 3G iPhone, according to The New York Times.

The Times cited label executives who leaked reports of “very active” negotiations. While a final deal has not yet been inked, the paper quoted a “label executive familiar with the matter” as saying that Apple wants a big launch in June.

Apple's annual Worldwide Developers Conference begins June 9, and many expect to see the introduction of the 3G iPhone during the event.

Ringtones: A Multibillion-Dollar Market

IDC expects that mobile entertainment will account for 5.1 percent of the $800 billion global wireless services revenue and 23 percent of all mobile data revenue by 2011.

Ringtones and ring-back tones (answer tones) are expected to lead the way, along with mobile television and video services. Ring-back tones should overtake ringtones by 2010 to become the single largest revenue source in the mobile entertainment category by 2010, IDC reported.

“I'm surprised Apple hasn't done more around ringtones. Right now, iPhone users can't buy AT&T ringtones, which is rather curious. I have suggested that Apple has its own walled garden of content, if you will,” said Lewis Ward, an analyst at IDC. “Ringtones have been one of the success stories around mobile entertainment services in the past five years, growing from nothing to $1.2 billion in the U.S. this year.”

Apple is reportedly looking to add ringtones, ring-back tones and songs downloaded over-the-air directly from its iTunes Store over a cell phone broadband network. The music labels are reportedly arguing that hey should be paid more for an over-the-air download than a track bought over the Internet.

Apple's Direct Assault

“Some of these ringtones from the carriers can cost $2 or $3 per unit; it costs twice as much for a full track,” Ward said. “As long as there is demand, it makes sense that Apple would try to get into the market much more directly than they are.”

The possibilities are huge for both sides. Apple can tap into the figures IDC cited, which represent new revenue streams for the iPhone, and the music labels can ride on the back of the iPhone's popularity. Investment-banking firm Piper Jaffray estimates Apple works with carriers that reach 575 million cell phone users.

Apple still has plenty of competition, though, and the music labels know it.

What's more, IDC's Ward said full-track over-the-air downloads have not performed as well as ringtones and ring-back tones. There are several reasons for this, he said, noting that the average youthful audiophile can listen to free music on the Internet and has megs of music burned on CDs, PC hard drives and iPods. Music listeners can also find pirated music for free online, Ward said, but seem to be willing to pay for music if the experience is good.

“Over-the-air downloads have immediacy,” Ward said. “What that immediacy does is help those of us who are dangerous impulse buyers to go ahead and spend that extra money. If you really want it and they make it really easy, carriers can make the case for charging a premium for that instant gratification.”