iTunes has officially eclipsed Best Buy in music sales and now comes in as the number two music retailer in the world. That's not just digital music either—that's all music, including CD sales. iTunes now sits just behind Wal-Mart, according to new data from the NPD Group that accounts for the amount of music sold during 2007. The trend shows once again that digital music sales are exploding at the expense of physical CDs, but the increase has yet to offset the decline in physical media sales.

According to NPD, there was "a sharp increase" in legal digital downloads, but a 10 percent decline in overall music spending (most likely because digital music stores enable people to buy individual tracks instead of full albums). The research firm says that the number of customers buying music digitally increased by five million last year, driven largely by those between the age of 36 and 50. Comparatively, NPD estimates that a million customers dropped out of the CD market last year, led mostly by the younger demographic. "In fact, 48 percent of US teens did not purchase a single CD in 2007, compared to 38 percent in 2006," said NPD.

People are no longer flocking to P2P anymore either, NPD found. It said that the number of US consumers using P2P file sharing for music plateaued at 19 percent during 2007, while legal music downloads grew. About 10 percent of music acquired in the US are legal music downloads, said the research firm, with iTunes coming out the strongest of all digital-only music stores.

"The continued growth in legal download sites is encouraging, yet the industry struggles to improve the value of each digital customer," said NPD analyst Russ Crupnick in a statement. "With so many baby boomers and gen-Xers entering the market, there are certainly opportunities to sell more digital albums, promote older catalog titles, or create bundles that will raise revenues. In the near term that’s going to be the best means available to narrow the gap on dwindling CD revenues."

It was only eight months ago that iTunes passed Amazon to become the number three music retailer. Wal-Mart is still holding its own with a massive brick-and-mortar retail business in addition to its online music store, but must be getting nervous as iTunes continues to close in. NPD did not provide data this time around about whether Amazon has shifted positions, but if it hasn't yet passed up Best Buy, it probably will soon. Amazon's DRM-free music store is the only one that sells unprotected tracks from all four major music labels (something that even iTunes can't brag about yet), and remains a force to be reckoned with in the digital market. Wal-Mart started selling DRM-free tracks as well in August of last year, but only from EMI and Universal, and only censored albums.

As CD sales continue to spiral downward, 2008 will be the first year during which all major music labels sell their music without DRM. The record industry hopes that will translate to even better sales throughout the year. But the labels will still need to figure out ways to sell more, by volume, to digital consumers. Otherwise, the trend of buying one-offs or a handful of track purchases will continue to eat away at the music industry's overall revenues.