The music industry believes it is winning its fight to persuade people to use new online download services which do not break copyright laws.
The industry was slow to enter the online music market
The International Federation of the Phonographic Industry (IFPI) said its campaign to inform people that online song-swapping was illegal was working.
It reported the market for selling music downloads, while still small, was gathering momentum.
It also warned a global legal crackdown on file-sharing websites was likely.
The IFPI, which represents major record labels around the world, has been battling to stem the amount of people downloading and swapping music for free over the internet.
It says downloading music for free deprives the artists of royalties and has contributed to a steady decline record sales.
"We believe that the music industry's internet strategy is now turning the corner, and that in 2004 there will be, for the first time, a substantial migration of consumers from
unauthorised free services to legitimate alternatives," said Jay
Berman, IFPI's chief executive officer.
Critics of the industry's policy argue that album sales have fallen worldwide due to changes in market conditions and not because of online piracy.
The US has taken an aggressive stance against file-sharers, recently issuing writs against another 500 suspected of using websites that do not recognise copyright such as Kazaa and WinMx.
In its report, the IFPI warned it would get tough on file-swappers around the world, with Europe, Asia and Canada expected to be targeted.
"It is likely that there will be lawsuits against major internet distributors internationally in 2004, similar to those filed in the US," the IFPI said.
The IFPI reports that threatened legal action worked as a deterrent to file-sharing, citing a number of studies.
The number of unauthorised music files available on services dropped from one billion in April 2003 to 800 million in January, according to the report.
On Wednesday, the Recording Industry Association of America began legal action against 500 people accused of sharing songs online without copyright.
But critics have said the move did not address the realisation that the record-buying market had radically changed in recent years.
The music industry was slow to realise the potential of the internet for providing music to consumers, allowing a proliferation of websites which offered music free to its users.
But now the major labels are continuing their drive to invest in industry-backed services, taking revenue back to the industry.
Apple Computer's iTunes and the Roxio services are expected to launch in Europe within six months.