Yeah, that's how i'm picturing it. Except have the highlighted/larger selection tabbed out a few spaces so you get the swing effect. Maybe some sort of spacing to the left to indecate you are in submenus similar to how it's done now horizontally.

As for the wasted real estate... are you refering to space to the right of the text, if the text isn't long enough to reach the other side of the screen? I'd say that space SHOULD be blank (or a dimmed out background) for readability sake and to allow for many charactered items... which is the biggest benefit as far as i see it. With this setup you can have a long band/album/song title and still be able to see what's before and after it.