First, the good news. Online music sales nearly doubled from the previous year and accounted for almost $2 billion in sales. When you look at the overall picture, online sales accounted for 10 percent of total music sales during 2006.

And the bad news? The surge in online sales did not replace numbers lost in the downward spiral of CD sales. Although people are buying more music online, people are buying even fewer CDs offline.

It was only a year ago when the International Federation of the Phonographic Industry said it expected online sales to make up for the losses the recording industry experienced over the past five years – losses the IFPI blames on music piracy and competition from new media.

But the IFPI’s 2007 Digital Music Report says growth in online sales has slowed compared to 2005, a year that showed sales nearly tripling when compared to the previous year.

With the issuance of the latest report, the IFPI also said it would move to sue Internet service providers if those providers continue to harbor users who have been identified as bona fide music pirates.

The IFPI also said it hopes online sales will begin compensating for the loss in CD sales sometime this year.

“We don’t have the holy grail of digital (online) offsetting the decline of CDs as yet,” IFPI Chairman John Kennedy said.

Alex Zubillaga, Warner Music’s chief executive VP for digital strategy and business development, said music companies were too complacent and needed to innovate to attract and keep customers.

As an example, Zubillaga cited Madonna’s latest album release, Confessions On A Dance Floor, which Warner Bros. issued in three different versions, noting that the two versions that included bonus material and cost $11.99 outsold the standard $9.99 CD.

The IFPI also reported that consumers purchased 795 million single-track downloads in 2006, up 89 percent on the 420 million sold during the previous year, and predicted that online sales will make up a quarter of all sales worldwide by 2010.