The Music Distribution Wars of '06

This column was originally published on RealMoney on Nov. 1 at 3:36 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Western mobile operators are stumbling out of the gate in the new melee among music distribution modes.

New music services from Sprint (S) in North America and mmO2 in the U.K. seem to be saddled with bizarre price points, and pressure from Apple's (AAPL) iTunes and satellite radio may well prevent the Western mobile operators from emulating the smashing success of mobile music in Japan.

Considering the runaway success of iTunes and the satellite radio boom fed by the Sirius (SIRI)-XM (XMSR) rivalry, the leading Western mobile operators have been curiously slow to address the music distribution market.

We are only now seeing their first real music service launches. Major mobile operators seem chillingly tentative and out of touch considering how rapidly the mobile music distribution market is evolving and growing. In October, the record industry trade group IFPI reported that revenue from physical formats of recorded music fell by 1.9% to 11 billion euros (about $13.2 billion) during the first half of 2005. During the same time frame, the sales from digital music distribution vaulted by more than 250%, reaching 660 million euros.

Global sales are still clearly dominated by tangible stuff such as CDs and DVDs. But it's quite possible that the sale of physical formats have now begun a terminal decline. As the music industry realizes this segment is never going to show another year of revenue growth, it is likely to begin supporting digital distribution far more robustly than it has -- simply because it must.

The battle between distribution channels is going to get bruising in 2006, because iTunes and satellite radio had a surprisingly hot year in 2005. Mobile operators in both North America and Western Europe clearly thought they could afford to wait until 2006 to launch their music services in earnest. They have been engaging in elaborate negotiating processes with major labels and waiting for new network technologies like W-CDMA and EV-DO to become widely available.

But something unexpected happened in 2005 -- not one, but two new breakout music distribution modes had a banner year. Apple will sell more than 20 million iPods in 2005 alone. Sirius and XM Radio combined will top 8 million subscribers by the end of 2005.