The music industry is facing its biggest challenge due to the prominence of illegal downloading, according to the International Federation of the Phonographic Industry (IFPI).
Some 95 per of music downloaded online is illegal, the global music trade body said, meaning record labels and musicians are missing out on valuable revenue.
And despite the huge rise in downloading as a form of music consumption - it accounts for a fifth of all recorded music sales in the UK - increased digital sales are undermined by increased piracy.
Some 1.4 billion single songs were downloaded legally in the last year, with Lil Wayne's Lollipop topping the charts with 9.1 million downloads.
However, some 40 billion files were illegally shared at the same time, according to the IFPI.
"The music sector is still overshadowed by the huge amount of unlicensed music distributed online," it said.
The new report from the IFPI - which represents 1,400 music companies in 72 countries - said the digital music industry had experienced steady growth for the last six years.
With a huge 25 per cent growth in 2008, it is now worth an estimated $3.7 billion (£2.5 billion).
"There is a momentous debate going on about the environment on which our business, and all the people working in it, depends," said John Kennedy, chairman and chief executive of IFPI.
"Governments are beginning to accept that, in the debate over 'free content' and engaging ISPs in protecting intellectual property rights, doing nothing is not an option if there is to be a future for commercial digital content."