The increase in online spending didn't offset the revenue lost from the drop in CD sales and from illegal downloading. Last year, about 1 million consumers stopped buying CDs, according to NPD.
There are several ways for consumers to expand a digital music collection. They can buy music at online stores such as iTunes and Amazon.com's MP3 store. They also can convert their CD collection into a digital format.
What concerns the music industry is illegal Internet file-sharing on websites where people pick up a digital song or album that others have uploaded. They can also do what is known as peer-to-peer file sharing, when people download music while temporarily opening up their computers to others to pick up music. The music industry says people who obtain music free online are breaking the law.
Rachel Rottman, 14, says she hasn't bought a CD in a year. The Santa Monica High School freshman says she downloads five or six songs a day, using paid services such as iTunes and social networking site MySpace, where bands post songs for free download. Rachel said she had about 2,600 songs stored on her computer.
Before getting a computer in the seventh grade, she always bought CDs. But now it's too much trouble, she said.
"You have to go to the store and then you have to pay -- I don't know how much, $12, I'm guessing? -- then you have to put it on your computer," Rachel said. "When you download it, it's right there."
Hunter Conrad, an eighth-grader at Lincoln Middle School in Santa Monica, says she downloads about 80% of her music from iTunes, "but when it's an artist I really like, I'll buy the original CD."
Out of her group of friends, she's "one of the few" who still buy CDs, she said. Most of her buddies download for the convenience, to save money and to get only the songs they like.
"Nobody really wants the other songs [on an album]," Hunter, 14, said. "They just want the hits."
In the last year, consumers paid for 42% of the music they obtained, the report said. That was down from 48% in 2006 and more than 50% in 2005.
"The trend is continuing but it will flatten because there are people who will always want the physical," said Ted Cohen, managing partner at TAG Strategic, a digital media advisory firm.
Over the last year, the music industry has pushed back. Some companies now permit online music stores to sell songs without copyright protections in hopes of making it easier for consumers to move digital music to different computers and devices, and thus remove the temptation to download it illegally.
