CDs accounted for 65 percent of all music sold in the first half of 2009 compared to paid digital downloads, which comprised 35 percent of music sales. By comparison, paid digital music made up 20 percent of sales in 2007 growing to 30 percent of the music market last year.

"Many people are surprised that the CD is still the dominant music delivery format, given the attention to digital music and the shrinking retail footprint for physical products," said Russ Crupnick, vice president of entertainment industry analysis  for The NPD Group.

Russ Crupnick
The NPD Group

"But with digital music sales growing at 15 to 20 percent, and CDs falling by an equal proportion, digital music sales will nearly equal CD sales by the end of 2010."

When it comes to the unit-sales volume of all music sold, iTunes leads in the U.S. with 25 percent of music units sold, which is up from 21 percent in 2008 and 14 percent in 2007. Wal-Mart remains in the second spot with 14 percent of music volume sold at their stores and website and Best Buy ranks third.

iTunes continues to cement its lead in the digital music arena, as consumer downloads from iTunes represented 69 percent of the digital music market in the first half of 2009 followed by AmazonMP3, a distant second at 8 percent. Wal-Mart leads all sellers of CDs with a 20 percent share of the physical music market, followed by Best Buy at 16 percent and Target and Amazon tied at 10 percent each.

"The growth of legal digital music downloads, and Apple’s success in holding that market, has increased iTunes’s overall strength in the retail music category," said Crupnick.

"But the importance of the big box retailers shouldn’t be dismissed, as long as the majority of music consumers continue to buy CDs."

Despite data indicating digital music will soon make CDs obsolete, the report found 73 percent of music fans are still happy buying CDs over downloading tracks. Interestingly 66 percent of 14-18 year olds favor CDs over downloads and 59 percent of all music fans still listen to CDs everyday.

"Digital is still the future but rumors of the death of the CD are premature. The continued popularity of the CD should be looked upon as an opportunity," said The Leading Question CEO Tim Walker.

Paul Brindley

"We believe that labels and online stores could and should be doing more to build on music fans’ familiarity with CDs to provide them with additional digital content and to use the CD as a bridge into the digital world. Music fans have spoken and digital is evidently not the clear cut replacement to the physical CD."

The research found that even though most digital music fans continue to buy CDs, there is little evidence that digital music downloads are making up for physical sales.

Those who are paying for a digital music subscription service spend more on CDs each month than most music fans ($27.74 per month compared to $18.70).

Those who stream music also spend more on CDs ($20 a month) and downloads ($11.54 per month compared with a survey average of $6.26) than most music fans.

"While we fully expect that digital will eventually replace most physical consumption, this is not a clear cut replacement cycle like the change from vinyl to CD," said Music Ally CEO Paul Brindley.

"It’s particularly encouraging that those who are listening to streamed music on their computers are actually buying more music on both CDs and downloads than the average music fan. This suggests that digital can and is being used as a way of sampling new music which users may then go on to purchase."

Purchases of online digital music downloads increased by 29 percent since last year; they now account for 33 percent of all music tracks purchased in the U.S. NPD’s Digital Music Study, also found that there were nearly 17 million fewer CD buyers in 2008 compared to the previous year.

Russ Crupnick

The decrease in CD buyers applies to all demographic groups, but was particularly focused on teens and people over the age of 50. "Rising incidence of paid downloads is a positive development for the industry, but not all lost CD buyers are turning to digital music," said Russ Crupnick, entertainment industry analyst for The NPD Group.

The study also revealed there were 13 million fewer music buyers in the U.S. last year, compared to the prior year. The drop in music purchasing was led by a 19 percent decline in CD sales. Only 58 percent of Internet users said they purchased CDs or digital music last year, compared to 65 percent in 2007.

The study found there is evidence that music listening is increasing. Awareness and usage of Pandora doubled year over year to 18 percent of Internet users; one-third of those who were aware of Pandora report using the service.

Social networks are also playing a larger role when it comes to listening to music. The percentage of people reporting they listened to music via a social network rose from 15 percent in Q4 of 2007 to 19 percent in Q4 2008. Close to half of U.S. teens are engaging with music on social networks, an increase from 37 percent a year ago. For college-age Internet users the percentage increased from 30 percent in 2007 to 41 in 2008.

"The trends we’re seeing in our consumer tracking studies are evidence of the continued transformation of the music industry," said Crupnick.

"Just as music piracy and the advent of digital music ended the primacy of the CD, we are beginning to see new forms of listening challenge the practice of paying for music. The music industry now has to redouble efforts to intercept and engage these listeners, so they can create revenue through upselling music, videos, concert tickets, and related merchandise."

The overall drop off in music purchases includes CDs, digital music downloads, and P2P file sharing sites.

The amount of U.S. Internet users, age 13 and older, purchasing a CD in the prior month fell from 25 percent in Q3 2007 to 22 percent this year. NPD estimates that the volume of CDs purchased fell by 19 percent in Q3 compared to last year. The most significant declines in CD sales were among teens (down 34%) and among adults age 26 to 35 (down 36%). CD purchases by adults age 36 and older were more moderate with a 10 percent decline.

Digital downloads saw growth in the number of buyers, and the volume of songs sold in Q3. Fifteen percent of Internet users purchased music from online music stores, such as iTunes and AmazonMP3, which is an increase of 2 percent over last year and is about 2.8 million additional music -download customers. Legal music downloads were up 29 percent in Q3 with positive number for all age groups except those 50 and older.

"The continued growth in the customer base for paid digital downloads is positive, particularly for teens, but it’s counteracted by deepening softness in CD trends," said Russ Crupnick, entertainment industry analyst for NPD.

"Alternative distribution deals in mobile and social networking are important ways for the music industry to fill the gap left by the decline in traditional revenue streams."

The number of Internet users sharing music on P2P sites remained steady at 14 percent in Q3, but the volume of music shared via P2P sites increased by 23 percent, as P2P users reported downloading more files. Teens purchased 34 percent more digital downloads compared with last year.

"The industry has managed to constrain the number of people who are file sharing, but the expanded use of services such as Bit Torrent enable entrenched P2P users to download a growing number of files," said Crupnick.

Video gaming also has had a positive effect on the music industry. Twenty-two percent of music buyers and 35 percent of people under age 35 said they played a music-based video game, such as Rock Band or Guitar Hero, in the last three months. This has led to music gamers finding music and making digital or CD purchases.

"Even though gaming competes with music for the consumer’s entertainment wallet share, music-related games are evolving into an important source for music discovery that can have positive revenue implications for the recording industry," Crupnick said.