Global music sales fell by an estimated 10% last year, despite the growing popularity of the digital music market, according to an industry report.
Leona Lewis helped boost online music downloads
The International Federation of the Phonographic Industry (IFPI) said although downloads rose by 40% in 2007, losses are still being made.
The organisation blames music piracy for the shortfall.
It is calling on internet providers to disconnect people who repeatedly download illegally.
In November French President Nicholas Sarkozy backed an industry agreement which could make internet providers block customers involved in piracy.
IFPI chief John Kennedy called the idea "the most significant milestone yet in the task of curbing piracy on the internet".
In Belgium last year a court ordered the internet provider Tiscali to block users from file sharing.
"If the internet service providers played their role it would have a dramatic effect," said Kennedy.
In the UK, the music industry is talking to the government and various internet providers in the hope of getting a voluntary agreement.
More and more people are downloading music
"Unpaid copying and downloading lies at the root of the recording industry's problems, and internet service providers must be at the heart of the solution," said Geoff Taylor, chief executive of industry body the BPI.
"2008 must become the year when talk becomes action."
Eammon Forde, editor of music business and strategy magazine Five Eight, does not think the shift in the music business is all down to one issue.
"Obviously piracy is playing a part, but also there's competition from other entertainment sectors and consumers aren't as loyal to artists as they used to be," he said.
"Digital has opened things up. It's made consumers more able to access more music," he added.
Mr Forde believes the decline in physical sales is not a new thing.
"This is something that has been talked about for a number of years," he said.
"Physicals have been on decline on average year-on-year since 1999 and 2000. The physical market is in freefall, both in terms of units and in terms of value," he added.
Earlier this month the music industry body the BPI revealed album sales in the UK alone suffered a drop of nearly 11% in 2007.
It blamed the drop on copyright theft and difficult retail conditions, but added that sales were still 26% higher than a decade ago.