Warner Music Group's (WMG) shares fell as much as 7.3 percent in their first day of trading Wednesday on concerns about the impact that online music would have on the future of record companies.

While online music has grown exponentially over the last several years, analysts noted there is no proven time horizon for established record companies to profit from that growth, when physical CD sales still account for as much as 98 percent of music sales, by some estimates.

"When can you be confident that the growth in the digital side of the business will offset the declines in the physical business? No one has an answer to that question. And investors are responding accordingly," said Fulcrum Global Partners analyst Richard Greenfield.

The IPO for 32.6 million shares, or about 23 percent of outstanding shares, priced Tuesday night at $17 a share, yielding the company about $556 million, well below the low end of its expected range of $22 a share.

Shares initially fell to $15.75. They ended the day at $16.40, making the company's market capitalization $2.35 billion, compared with the $2.6 billion Edgar Bronfman Jr. (search) and private equity investors paid for the company nearly a year ago.

Goldman Sachs and Morgan Stanley were the lead underwriters for the IPO.

"The underwriter finds it a little embarrassing when the price falls," said University of Florida professor and IPO expert Jay Ritter. "In terms of ballpark numbers, on the first day of trading 15 percent of IPOs trade flat and 10 percent fall."

By comparison, the market capitalization of EMI Group Plc (search), the only other publicly traded stand-alone music company, is 1.9 billion pounds, or about $3.5 billion.

EMI shares were down 2.2 percent at 229 3/4 pence in London. There has been widespread speculation the London-based company might soon merge with Warner Music to compete more effectively against Universal Music and Sony BMG, both of which have a much larger share of the market for recorded music.

For much of the past five years, the music industry has been reeling from the popularity of online file-sharing services that industry executives believe are havens for piracy. At the same time, other modes of entertainment such as DVDs and video games have eaten into revenue.

But the popularity of Apple Computer Inc.'s (AAPL) iPod (search) digital music player and its accompanying online music service, iTunes, has reinvigorated some faith in the music industry.

Other services such as Yahoo's (YHOO) recently announced subscription service, along with RealNetworks' (RNWK) Rhapsody and Napster Inc.'s (NAPS) service, have also added a shot in the arm to the online music market.

Nevertheless, year-to-date U.S. music sales fell 7.6 percent for the week ending May 8 from a year ago, according to Nielsen Soundscan, although Warner Music is outpacing the industry, falling only 2.6 percent in that time frame.

"When the vast majority of your sales are physical CD sales and the market is moving away from physical sales, your revenue model and how you alter your cost structure to adapt to that new revenue model are unknown," Fulcrum's Greenfield said.

Another thorn in Warner Music's side is a dispute with rap- metal band Linkin Park (search), which earlier this month demanded to be released from its contract, saying the label was not marketing its music effectively. Sources have said the band's demands have more to do with contract renegotiations than marketing.

Warner's IPO comes amid an unsteady U.S. IPO market. Last week Lazard Ltd. (LAZ) stock fell 4 percent in its market debut after pricing at the low end of its estimated range. Its shares fell a further 4.7 percent in Wednesday trading on the New York Stock Exchange.