TOKYO, April 6 (Reuters) - A unit of Sony Corp said on Thursday it would set up an online music distribution system with 10 big Japanese recording companies in a bid to tap the promising Internet music market.

Internet service provider Sony Communications Network said it will set up a new company, Label Gate, to offer a music portal site which will allow users to download music sold by the participating record companies, which together hold a 60 percent share of Japan's recorded music market.

Several Japanese companies including Internet investor Softbank Corp and mobile phone service provider NTT Docomo have already announced plans for online music distribution, but analysts said the breadth of companies taking part in the Sony venture will give it a decided advantage.

Sony Communications president Senji Yamamoto told a news conference that the company will initially be set up with 50 million yen ($480,000) in capital and later issue new shares worth another 50 million yen to the 10 record companies before launching its service in late April.

Those firms include Avex Inc , a major Japanese producer of music CDs, and Sony Music Entertainment, the record label arm of Sony.

The record companies will decide the content and the pricing of their products, while Label Gate will provide the payment infrastructure and customer support, said Yamamoto, who will head the new company.

Sony Communications estimates revenue of 6.5 million yen for the first year from the commission it will receive from the partcipating companies. But the stock market appeared unimpressed by the news. Sony shares closed Thursday on the Tokyo Stock Market down 190 yen or 1.33 percent at 14,060, while Avex shares closed down 1,560 yen or 8.76 percent at 16,240.

ONLINE DISTRIBUTION STILL AT EARLY STAGE

Label Gate will be facing fierce competition from companies like Softbank and NTT Docomo which announced similar ventures earlier this year to tap into Japan's music CD market, which has annual sales of 700 billion yen.

Softbank said it will launch eS!Music Corp, which will allow customers to download music for about 100 yen a song by June, while NTT Docomo and Matsushita Communication Industrial Co Ltd set up Air Media Inc to distribute music over mobile phones by autumn of this year.

Analysts said that the fledgling online music business still needed to build up a distribution infrastructure, including standardising recording and playback formats, while copyright issues also had to be addressed.

"There is a lot of potential in the new business, and the industry in general is heading in that direction, but Japan first needs to set up hardware and software infrastructure before we see this becoming mainstream," said Hiromi Abe, Internet analyst at Morgan Stanley Dean Witter.

VENTURES YET TO THREATEN RETAIL SHOPS

Soichiro Fukuda, analyst at IBJ Securities, said he did not immediately expect to see the kind of explosive demand for online music distribution that would threaten retail shops now selling a CD with one or two songs for about 1,000 yen.

Currently, it takes at least 20 minutes to download a CD album from the Net, and customers will still find it easier to buy or rent a CD until technology comes up with a faster way to transmit the music files, said Fukuda.

"I'd say it's still all in the experimental stages," said Fukuda, adding he expects it to take at least two more years for the online distribution business to truly pick up.

Record companies are also intent on reassuring shops that the venture was not meant to put them out of business.

"Our strategy will continue to be based on package sales at record shops," said Akihiko Terajima, President of King Records, one of the firms which will join the venture.

($ equals 105 yen)