Music industry hopes for, yet fears, iPhone effect

NEW YORK (Reuters) - The music industry has long hoped mobile phones will help turn around weak music sales, but music executives privately fear the most obvious contender, the iPhone, may give too much clout to Apple Inc. (AAPL.O), in shaping the future of the fledgling mobile music market.

Sales of CDs, still the dominant music format, have dropped more than 20 percent in 2007 from a year ago, according to Nielsen Soundscan. Digital music sales are gradually claiming a greater portion of the business, but the transition has been slow. Sales of full-length songs on cellphones still claim a small portion of the market.

Some executives say the iPhone could speed up that trend after the device's U.S. launch on Friday, if the much wider base of consumers who own cell phones see the phone as a music machine.

"It is going to change the way people think about their mobile from being a fringe portable entertainment device to everyone recognizing that this is a really desirable mainstream device," said Barney Wragg, global head of digital for EMI Group's EMI.L recorded music unit, the world's third-largest record company.

That view is tempered by concerns over Apple's increasing power base in digital music sales, which rose more than 50 percent in the first quarter, according to Nielsen Soundscan. The total U.S. music market slimmed to about $11.5 billion in 2006, according to music trade body Recording Industry Association of America.

"Ironically, the iPhone comes at a time when the music industry would like to see a stronger player other than Apple," says Michael Gartenberg, analyst at JupiterResearch.

Apple's iTunes Music Store, which sells only digital music on line, has risen to third place among music retailers overall with around 10 percent of sales in the United States, behind Wal-Mart Stores Inc. (WMT.N) and Best Buy Co Inc. (BBY.N), according to NPD Group. The company's iPod device also accounts for nearly 80 percent of the market for digital music players.

"But the real question is whether their competitors will be able to capitalize and offer improved service offerings that challenge Apple," Gartenberg said.

MOBILE MUSIC COMPETITION

Mobile handset makers and their network operator partners have been investing heavily in the music space. But many users still don't see their phone as a music device for anything beyond choosing ringtones.

JupiterResearch estimates that U.S. consumers will own nearly 28 million music playing phones by the end of 2007. But it expects that "only a modest percentage of consumers will actually listen to music on their phones."

The iPhone, which will be carried exclusively in the United States by AT&T Inc. (T.N) for at least two years, will work like the iPod, syncing digital songs and video via the iTunes application on a desktop-based personal computer.

Some music industry watchers are surprised the iPhone will not offer over-the-air song downloads at launch. They see such a feature as the Holy Grail of digital music sales, allowing subscribers to buy music on impulse while on the move.

Rival operators Sprint Nextel Corp. (S.N) and Verizon Wireless, a joint venture of Verizon Communications (VZ.N) and Vodafone Group (VOD.L), offer services that encourage impulse purchases of music downloads over the air.

In Europe, where the iPhone will launch next, over-the-air downloads are much more widely available.

"I don't think the iPhone is going to be the game changer that people are predicting," says Adam Sexton, chief marketing officer of Groove Mobile, the company which powers Sprint's music service and others in Europe.

While Apple may well meet its initial sales forecast of 10 million iPhones, that will still be less than 1 percent the world's global handset market, he noted. That leaves plenty of room for music companies to court other wireless partners.

"The record labels should be more focused on the other 99 percent," Sexton said.