While overall music sales were up 10 percent in 2008, the year saw a drop not only in CD sales, but in the number of customers actually purchasing music. But according to a new report, the act of music listening is actually on the rise. While digital music purchases remain strong, the numbers show that there is still much more work to be done in the industry's transition to a new, more diverse set of business models.

Sympathy for the devil?

NPD's annual Digital Music Study found that there were 17 million fewer CD customers in 2008 than in past years. CD sales have been dropping for quite some time, and while 1.5 billion songs were sold digitally last year, the number of Internet users paying for digital music only increased by 8 million in 2008.

NPD saw all demographics pulling back on CD purchases, but the most significant groups were teenagers and those over 50.

The primary reason for cutting down on CD purchases was a simple slashing of entertainment budgets across all demographics. Cheaper prices for digital albums also affected consumers' thinking about physical CD prices (which suddenly seem more expensive), but the pick-and-chose nature of buying individual songs and instant delivery also provided a boost for digital downloads.

Gaming also helped to steal attention away from music, as the industry experienced record billion-dollar growth in 2007 and 2008.

As CD sales continue their nosedive into oblivion and the worldwide recession takes hold, the companies that used to make physical media are feeling the effects. Last week, laid-off workers in a French Sony media plant effectively held boss Serge Foucher and head of Human Resources Roland Bentz hostage overnight by blocking the factory doors. The employees, who made tapes and other recordable media, were upset over the terms of their severance package (they would only get thousands of euros in relocation assistance and up to a year of severance pay, which was apparently offensive to their "dignity"). The executives were allowed to leave the building after agreeing to restart talks over the terms.

Not all news is grim

One trend that may finally be going mainstream is music streaming services. NPD's report notes that awareness and usage of Pandora doubled year-over-year to 18 percent of Internet users. Social network music streaming is also on the rise, as usage rose from 15 to 19 percent year-over-year. Nearly half of US teens are "engaging with music on social networks" now, so new revenue opportunities like premium account memberships and advertising are following.

Finally, NPD's report notes that "the music industry now has to redouble efforts to intercept and engage these listeners" in order to harness new revenue options like "upselling music, videos, concert tickets, and related merchandise." This is an idea that MySpace Music launched with last September, as the service offers merchandise like band t-shirts and Amazon goods when users purchase DRM-free MP3s.

The music industry is certainly experiencing a tough transition into the digital realm, but there's still money to made off of recorded music. The iTunes Store reached a digital music milestone in 2008 by passing Wal-Mart to become the number one music retailer in the US. There are now 36 million digital music customers, and digital music downloads now account for 33 percent of all music tracks purchased in the US.

Convincing customers to buy complete albums, though, now relies on overall album quality, not on forcing people to buy full CDs—and that means overall industry revenues may not recover to the levels seen during the CD boom years anytime soon.

Listing image by Flickr user Daveybot