http://online.wsj.com/public/article/0,,SB114720937654348137-9EdUQ_TVCE13Hhtf_d_UheSvnZ0_20060516,00.html?mod=regionallinks

Warner Music Group CORP. is mounting an ambitious experiment in South Korea, one of the most digitally connected markets on earth. The company is putting to the test what could be the media industry's biggest hope for preservation -- the merger of music and mobile phones.

Warner Music today plans to announce that it will merge the bulk of its Warner Music Korea operation into a new joint venture with SK Telecom Co., creating the kind of technology-content hybrid that is supposed to smooth the path for music to be made broadly available on cellphones and other digital platforms. SK Telecom will have a 40% stake in the venture, Warner Music will own roughly 60%.

The deal is unprecedented: No major music company has ever fully merged its operations with those of a communications network. The move highlights the growing importance of mobile phones as a platform for buying, storing and listening to music. In South Korea, sales of music to mobile devices now far outstrip CD sales.

As CD sales have fallen world-wide amid piracy, competition and other problems, digital-music sales over the Internet have been slow to catch up. But mobile phones have proven to be an unexpectedly rich source of music sales, particularly in Asia and Europe.

Mobile networks are more tightly controlled by their operators than the wide-open Internet, and are thus much less prone to become the kind of digital free-for-all spawned by file-sharing technologies. In the U.S., wireless networks have lagged behind those in Europe and Asia, and the mobile market is less developed. Sales to mobile phones are in a nascent stage, with efforts like Motorola Inc.'s phone that is compatible with Apple Computer Inc.'s iTunes Music Store mostly experimental.

And while Warner executives say the SK Telecom deal is unlikely to serve as a precise blueprint for other markets, they and others in the music industry have long called the cellphone the heart of their business's likely future. Many music industry executives believe that ultimately a single device will allow users to access music wirelessly, store it and listen to it, and that this will all take place in an environment that is more conducive to paid transactions than to free file sharing.

Warner executives called the SK Telecom deal a significant moment in that process. "If you want a lens into what the future can bring, Korea is a tremendous evolving model," said Patrick Vien, chairman and chief executive of Warner Music International.

The deal applies only to the acts signed to Warner's local label in South Korea, but still represents a significant gamble. In shifting its acts to WS Entertainment, as the new venture is to be known, Warner is effectively giving up nearly half the revenue it derives from them, in exchange for the prospect of greater sales in the long term.

Warner Music Group Chairman and Chief Executive Edgar Bronfman Jr. played down any risk associated with the new arrangement. "I don't consider it giving up anything," he said in an interview from Hong Kong, where he is expected to announce the new alliance in a speech this morning. "It's a tremendous opportunity. The price we pay for that is not only reasonable, we're taking the right approach to grow the business." The local acts who will join WS represent up to 70% of Warner Music Korea's sales, according to industry estimates.

The move comes as Warner Music is more broadly weighing its future in the form of buyout talks with rival EMI Group PLC, which restarted recently. But the deal with SK Telecom shows the company is not waiting to make moves in overseas markets, particularly in the area of digital music.

South Korea is a market primed for such a venture. The nation is perhaps the most digitally connected place in the world, with 62% of households receiving broadband Internet service, far more than any other country. (Japan is next at 50%. The U.S. lags behind at 39%.)

The market in South Korea for CDs has been decimated by factors including digital and physical piracy, declining by over 75% between 2001 and 2005 to less than $80 million. Mobile phones, music executives say, represent essentially the only retail channel that hasn't been undercut by piracy. Sales to mobile phones of songs, ring tones and the like grew to more than $530 million last year. An estimated 80% of mobile phones there can play MP3 music files.

In that environment, SK Telecom, the country's biggest telephone and Internet provider in terms of customers, has also become the largest music retailer, accounting for around 50% of all sales. SK Telecom also bought a majority of the nation's largest music company in terms of sales, YBM Seoul Records Inc., last year. Its MelOn music service has more than 4.2 million users, 600,000 of whom subscribe to a $5-a-month "all you can eat" service that gave access via PC or mobile phone to unlimited quantities of music.

Under the new agreement, WS artists are to be given preferred treatment on MelOn and other platforms, although executives declined to offer specifics.

The South Korean music industry has fairly unique consumption patterns, with mobile outselling physical music by a factor of six. Because of this, the prospect of music companies copying the recent deals there and scrambling to forge partnerships with local network operators elsewhere in the world is unlikely.

Nonetheless, Warner executives say the SK Telecom venture illustrates a broader commitment to an aggressive digital strategy. Mr. Bronfman recently told Wall Street analysts, for instance, that in releasing rapper T.I.'s chart-topping album "King," the company issued 100 distinct configurations of the disc's music, including ring tones, digital albums and other packages of songs and pictures. As a result, digital downloads, ring tones and the like represented 11% of Warner Music's revenue in the first quarter of 2006, up from just 5% a year earlier.

The joint venture is to be overseen by the managing director of Warner Music Korea, Phillip Oh, and controlled by Warner. Warner Music Korea's local roster includes singers such as Baek Jiyoung and Kyunwoo. Warner's international roster of stars, including Madonna and Green Day, will continue to be distributed by Warner alone.