The International Federation of the Phonographic Industry (IFPI) has come out with a report that states that digital sales now account for around 10 per cent of the music market as record companies experiment and innovate with an array of business models and digital music products, involving hundreds of licensing partners.

Among new developments in 2006, the number of songs available online doubled to four million, thousands of albums were released across many digital formats and platforms, classical music saw a "digital dividend" and advertising-funded services became a revenue stream for record companies.

However, despite this success, digital music has not yet achieved the "holy grail" of compensating for the decline in CD sales. Meanwhile, digital piracy and the devaluation of music content are a real threat to the emerging digital music business.

Research suggests that legal actions against large-scale P2P uploaders - some 10,000 of which were announced in 18 countries in 2006 - have helped contain piracy, reducing the proportion of internet users frequently file-sharing in key European markets. Yet actions against individual uploaders are only the second best way of dealing with the problem. IFPI is stepping up its campaign for action from ISPs and will take whatever legal steps are necessary.

IFPI‘s report shows how the record industry is combining digital technology with its traditional skills of discovering and marketing music. It also sets out where the music sector needs action by government and its industry partners to tackle piracy and prevent the undermining of its intellectual property rights.

Digital is empowering the music consumer: Consumers are finding that digital technology is helping to change their purchasing habits. They are taking advantage of the unlimited ‘shelf space‘ in online stores, buying recordings that would have long vanished from the shelves of even the largest offline stores.

Recent months have also seen digital music distribution channels diversify. A-la-carte download services, led by iTunes, remain the dominant digital format, but they compete in a mixed economy with subscription services, mobile mastertones and more recently new advertising-supported models and video licensing deals on sites like YouTube and MySpace.

Mobile music accounted for about half of global digital revenues in 2006, but the split between mobile and online varies sharply by country. In Japan around 90% of digital music sales are accounted for by mobile purchases. 2007 could prove to be a landmark year in the mobile music market, as handset makers such as Nokia and Sony Ericsson develop their music phone series. Meanwhile, Apple has announced the launch of the much anticipated iPhone.

Portable players are one of the major drivers of growth in the digital sector. New figures show that the proportion of portable player owners who source mainly from paid downloads is roughly the same as the proportion who source mainly from unauthorised P2P and free websites (14 per cent). Yet there is still concern at the relatively low levels of digitally purchased music that is stored on devices.

There is mixed news for the industry when it comes to digital piracy. Independent research analysts Jupiter suggest that record number of high-profile lawsuits against large-scale uploaders in 2006 did have a deterrent effect on illegal file-sharers. As broadband penetration across Europe doubled to 40 per cent between 2004 and 2006, the proportion of users regularly file-sharing fell from 18 per cent to 14 per cent. In the US, lawsuits were the most cited reason by computer users for changing from unauthorised P2P to legal downloading (NPD Group, June 2006).

Key successes against illegal operators were recorded in 2006; including Kazaa in Australia, Bearshare in the US, ZoekMP3 in Netherlands and Kuro in Taiwan.

Yet digital piracy is still a massive problem for the music industry and one of the major reasons that the surging legitimate digital market is not expected to make up the shortfall in the decline of the physical market in 2006.

IFPI chairman and CEO John Kennedy said, "The record industry today has evolved into a digital thinking, digitally literate business. Revenues in 2006 doubled to about $2 billion and by 2010 we expect at least one quarter of all music sales worldwide to be digital. This is a market combining evolution and revolution, where the learning curve is changing direction on a regular basis.

"The chief winners in the rise of digital music are consumers. They have effectively been given access to 24-hour music stores with unlimited shelf space. They can consume music in new ways and formats - an iTunes download, a video on YouTube, a ringtone or a subscription library.

"Yet the market remains a challenge. Other industries, such as film and newspapers, are struggling with the same problems that we have had to live with. As an industry we are enforcing our rights decisively in the fight against piracy and this will continue. However, we should not be doing this job alone. With cooperation from ISPs we could make huge strides in tackling internet piracy globally. It is very unfortunate that it seems to need pressure from governments or even action in the courts to achieve this, but as an industry we are determined to see this campaign through to the end."