Music industry hopes for, yet fears, iPhone effect

By Yinka Adegoke

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: Quote, Profile, Research, Stock Buzz), 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: Quote, Profile, Research, Stock Buzz) and Best Buy Co Inc. (BBY.N: Quote, Profile, Research, Stock Buzz), 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.