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At first glance, the vital signs of the music industry don’t look so good. According to the latest figures from the International Federation of Phonographic Industries, total physical unit sales in the first half of 2005 were $13.2 billion, down from $13.4 billion a year earlier. And this continues a seemingly endless trend of losses for music companies.

But these latest aggregate figures hide a different trend: online music has experienced phenomenal growth: roughly 350 percent since 2004. In this industry segment, sales skyrocketed from $220 million in the first half of 2004 to $790 million a year later. Dominated by Apple’s iTunes Music Store, online music purchases now account for six percent of overall sales, up from just two percent a year ago.

Understandably, the industry is quick to emphasize this good news. “The digital music boom is continuing and it is growing at an exciting pace for the music industry, for online retailers, and for consumers,” IFPI Chairman and CEO John Kennedy stated in a press release accompanying the results. “More and more people in a growing number of countries are turning to the new legal ways of downloading music on the Internet or via mobile phones.”

Even some at the file-sharing companies admit defeat. “The music industry has won not only the online music battle, it’s won the war,” says Wayne Rosso, founder of the much-assailed Grokster file-sharing system, and now chairman of Mashboxx, Grokster’s new owner.

Indeed, the music industry’s five-year legal crusade against the makers of file-sharing systems and users themselves appears to be resulting in a radical shakeup. In early September, an Australian court ruled that Kazaa, a peer-to-peer file sharing company founded by the same programmers who went on to create voice-over-Internet firm Skype, had enabled and authorized copyright infringement. The judge ordered Kazaa’s parent company to modify its software application to reduce the infringement – and to pay 90 percent of the court costs for the plaintiffs, who included the likes of Warner, Sony, and Universal.

Earlier, the U.S. Supreme Court’s ruling in June against Grokster spooked the remaining file-sharing companies into radically reworking their business models – or going out of business. Grokster itself was sold to Mashboxx, a company that provides industry-sanctioned files to file-sharing networks. WinMX, a popular file sharing service, has gone out of business. Meanwhile, eDonkey – another leading P2P company – will soon begin charging its customers for songs, according to company founder Sam Yagan.

Even BitTorrent, which developed a truly decentralized method of swapping files and has been the bane of music companies, may be changing its tune. The company recently took in $8.75 million in venture financing – and venture capitalists don’t usually throw that kind of money at a company that’s pursuing piracy as a business model. “BitTorrent will become the ideal platform for both independent publishers and the world’s leading media companies,” said BitTorrent creator Bram Cohen in a statement about the funding.

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