( dpa ) - South Korea's music industry is ailing under agreements made with mobile phone companies to sell songs online after it underestimated the popularity of music downloads.
Music companies said the deals are limiting their profits and driven some of them out of business.
But both music and phone companies are victims of widespread illegal music downloading, which has resulted in a wave of consolidations between the firms as they seek to reach a bigger audience of music fans.
In internet-savvy South Korea with its growing network of young fans downloading music, the alliance between the music and mobile phone companies sounded like a sensible one when they teamed up to offer legal music downloads on the phone companies' online music stores.
In the past few years, SK Telecom, KTF and LG Telecom have offered at least 800,000 songs each from their contracted music companies on those websites.
However, the partnership has turned sour for the music industry as customers have been moving from CDs to a digital format at a much faster pace than expected and music companies have begun pleading with the phone companies to overhaul the revenue-sharing structure that they said heavily favours the telecommunications firms and is hurting their bottom line.
"I woke up one morning to find that around six in 10 of my friends at music recording companies were already gone [out of business]," said Kim Gwang Soo, an executive at Mnet Media cable television.
Most of those failed music companies were smaller ones, but even a major music company like Shinara went out of business in 2005 because it was unable to cope with shrinking CD sales.
Another major player, Yedang Entertainment Co, had brought in 20 million to 30 million US dollars annually in the early part of this decade but posted a 35-per-cent drop in its revenues in 2007 despite the company's expansion into other areas of the entertainment business to reduce its exposure to shrinking CD sales.
Customers usually pay 500 won, or less than 50 US cents, to download a song from phone companies' music stores. Recording companies receive an average of 25 per cent of that purchase price.
Other major music sites like www.bugs.co.kr, which has several million members, pay more, passing on 35 to 45 per cent to the music companies for each downloaded song.
In contrast, iTunes, the world's most popular digital music retailer, sells songs for 99 cents in the United States and passed on 65 per cent of the purchase price to music companies when the firms contracted with Apple in the late 1990s.
South Korean music companies argued that under their contracts with the phone companies, they are unable to benefit from the growing popularity of downloaded music.
"When we were sitting for the contract, we never dreamed that digital music was going to turn into such a huge mainstream trend that would eventually outpace the CD market," said Kim Gye Hyung, a spokeswoman at the Korean Association of Phonogram Products, a music industry lobbying group.
Digital music now accounts for more than 80 per cent of total music revenues in South Korea.
While CD sales shrank from 400 billion won (424 million dollars) to 70 billion won from 2000 to 2007, revenues from digital music sales surged from 70 billion to 370 billion won during the same period, and SK Telecom, KTF and LG Telecom are taking the lion's share of those digital music revenues.
The three companies are not heeding the pleas of the music firms, but their partnership remains solid when it comes to fighting illegal music downloads.
A 2007 report from the Korea Music Copyright Association said users were illegally downloading an average of 45 songs each per year for a total of 18.5 billion songs worth about 456 billion won.
As a result, the three mobile phone companies - SK Telecom, KTF and LG Telecom - are also struggling to keep their music sites financially prosperous as revenues from their music sites fall below their expectations.
"We are generating only half of what we had initially expected from the online music business," a manager at SK Telecom said.
To fight back, consolidations between the phone companies and major music companies have become common as both seek to reach a wider customer base.
KTF, the second-largest mobile phone company after SK Telecom, recently acquired the major music site www.muz.co.kr with 5 million members. The site is run by Bluecord Technology Co, which has the major music company Doremi Media as a subsidiary.
KTF followed suit after SK Telecom acquired the major music company YBM Seoul Music in 2005.
Worries abound, however, that in the chase for a bigger share of the crucial youth market and higher sales, artistry is taking a back seat.
"Music companies are often so busy chasing after young fans that the quality is not serious," music critic Kim Jak Ga warned. "Singers are too downcast to be creative."