Competition time

The firm's analysis of Europe's online music market shows that more than 7% of Europeans own and use a portable music player. In 2004 that figure stood at 2%.

Alongside MP3 player ownership there is a booming interest in music portals such as Napster and Apple's iTunes through which many people buy tracks to put on their player, says the report.

In 2006, Screen Digest predicts that Europeans will spend 280m euros (£189m) buying music online.

The analyst firm expects this market to reach 1.1bn euros by 2010 when the number of portable players owned by Europeans reaches 80m.

Despite the growth, Screen Digest predicts that the overall European music market will continue to lose value until 2010 at the earliest - when sales of downloaded music will have grown enough to offset the losses.

But the expected gradual improvement in sales should not make music makers complacent, warned Dan Cryan, an analyst at Screen Digest, because the growth in online sales will not entirely stop the drop off in total revenues.

Instead, he said, record labels must make the most of new opportunities on mobile phones and on the net to get more music to more people.

Also, he said, music firms must look beyond the traditional duality of single and album and find additional ways to present songs to fans.

The report notes that since 2001 the total European market for recorded music has lost 22% of its value but it warned against blaming piracy for this decline.

It referred to figures from the International Federation of the Phonographic Industry which show that the number of pirated files in circulation online had declined substantially between 2003 and 2005.

The report also said the fact that stores such as HMV and Virgin were branching out into books, mobiles and other media had left less shelf room for CDs.

Perhaps most important was the rising popularity of DVD.

Said the report: "the fact that the decline in physical music sales corresponds to the boom in DVD sales begins to look less like a coincidence and more like a cause."