The number of iPhone sales in the fourth quarter of last year increased over the previous quarter, but Apple still lost ground in overall market share thanks to increased smartphone penetration.

According to ABI Research, via the Wall Street Journal, Apple sold 8.7 million iPhones in the final quarter of 2009. That's an 18% increase over the previous quarter, no surprise given all the holiday sales. But its market share fell from 18.1% in the third quarter to 16.6%. Overall, the smartphone market grew 26% from quarter to quarter.

According to a report by a different research firm, Strategy Analytics, Nokia's smartphone sales lead the way with a 39.2% market share, from 35% in the third quarter. BlackBerry makers Research in Motion came in second at 20.2%, slightly down from 20.8% reported the prior quarter.

UPDATED: On a year-over-year basis, the global smartphone market increased 30% according to Strategy Analytics. Nokia led the way with 39% market share on the year, down from 40% for all of 2008. RIM came in second with 19.8% for the year, from 15.5% the year before. And Apple third with 14.4% on the year, from 9.1% in 2008.

What constitutes a MP3 Player?

The results raise interesting questions about the future of digital music devices and their impact on the music industry. Apple still dominates the traditional MP3 player space, claiming a 70% market share when you exclude mobile phones. But the overall broadening of the smartphone market and the number of music applications being made for it have blurred the lines of what exactly constitutes a MP3 player and what doesn't. While a la cart digital downloads for standard mobile phones continue their slow plod, streaming music services designed for smartphones are experiencing skyrocketing growth. Several new applications - such as Thumbplay Music, Dada Entertainment's Play.Me, and Melodeo's nuTsie - emerged at CES last month, and additional streaming services from Spotify and perhaps Apple are expected in the months to come.

These efforts remain in their infancy, but are expected to play a major role in the digital music landscape for the year ahead. That's nothing but good news for a music industry that relies on more advanced devices to drive mobile music adoption.