CDs are slowly giving way to MP3s.

Things will get worse for the music industry before they get better. "Things" in this sense means the erosion of recorded music sales, flux in how music is consumed and a loss of control over how product is distributed.

US recording industry revenue fell by $11 billion at year-end 2006, down 25% from a 1999 peak of $14.6 billion, according to Yankee Group's "US Digital Music Forecast: What Fate Awaits the Record Labels?" report.

Yankee Group said the rise of digital music will compensate slightly for this loss, reaching $5.34 billion by 2012, up from $1.98 billion at the end of 2007.

"The basic relationship between recording artists, record labels and consumers is in major flux," said Michael Goodman, director of digital entertainment at Yankee Group. "As bands retain ownership of their music, the record label's role shrinks while the role of technology vendors and online music stores grow."

Online music will dominate the digital music market by 2012, according to Yankee, with mobile accounting for only 20% of the market. The research company predicted that although the addressable market for music phones will have grown to more than 266 million, only 9% of mobile users would be actively using them as portable music players.

Read more - eMarketer