By Jane Wakefield
BBC News website technology reporter
It has been an exciting, if strange, year for digital music as it continues to lead a double life, finally embraced by the mainstream music industry while continuing to thrive in the underbelly of illegitimate downloads.
Everyone wanted a digital music player for Christmas
Digital music players are selling faster than hot cakes and MP3, a once obscure audio file format, is on everyone's lips and made many Christmas lists.
An MP3 player became a must-have, due largely to the cool value of Apple's iPod.
"It has attained iconic status even though it is nowhere near the best player on the market," said Paul Myers, founder of music download site Wippit.
With everyone wanting a bite out of the Apple pie, there are plenty of alternatives and Mr Myers cited the Archos and Creative's Zen Micro as his must-have buys.
"Music somehow got cooler when people knew it was being played on an iPod," he said.
iPod has become the epitome of cool
Wippit is one of the few legitimate sites to support the MP3 format but it remains a dirty word for the music industry desperate to eradicate file-sharing which they regard as its ultimate bete noir.
"It is ironic that MP3 is so successful but the main legitimate services aren't using it," said Mark Mulligan, an analyst with Jupiter Research.
So anyone who unwrapped an iPod this Christmas will not be able to download tunes from Napster or any of the other services that support just the Windows Media Audio format.
And anyone who opened an Archos or one of the other digital players on the market will not be able to visit Apple's iTunes, because it uses a proprietary format.
The complexity of competing download formulas could add MP3 rage to the list of stresses people face over the festive season.
"The message boards are likely to be awash with complaints in January as people realise there are lots of interoperability issues," said Mr Mulligan.
Their frustration is likely to send them straight into the arms of the file-sharers which primarily use MP3, a format handily supported by most music players on the market.
Good year ahead
Legitimate digital music sales have had a good year. Apple's iTunes music store says it has an average of 25 downloads per customer.
Digital music, it seems, has come of age this year but there is no doubt that it had a somewhat hampered start.
"In Europe at the beginning of the year it wasn't so much stuck in the starting block as having its feet nailed to them," said Mr Mulligan.
A colourful future for digital music players
While digital music has grabbed more than its fair share of headlines over the last year, it still only accounts for a tiny percentage of music profits.
According to Jupiter Research, digital music in Europe will make £90m in 2005, which is only 1.3% of the music industry's total profit.
While digital music players are flying off shelves there are still four times as many people that own a portable CD player.
Wippit's Mr Myers remains optimistic that 2005 could be a very good year for digital music.
"I reckon that by the end of the year, download sales could be outstripping singles," he said.
This will partly be driven by a convergence between downloads and ringtones, which will increasingly merge, he believes.
Wippit is due to launch a service next year that will allow users to download a complete song and then edit it themselves to create a personalised ringtone.
Experts say it is likely that mobile phones will increasingly have MP3 decoders fitted as standard and makers of digital music players will enter the telephony market.
If 2004 was the year music became cool, with iPods marketed as a must-have style accessory, then 2005 could see functionality creep back into the picture.
"Historically, MP3 players have either been good-looking, or fully loaded with functionality," said a spokesman for Creative.
"The new generation of MP3 players combine cool design with extensive features. Add to that the choice of a wide range of colours, and you have the blueprint for any successful MP3 device in 2005," he added.
Whatever happens with the players, the file-sharing networks are likely to still be providing millions with the music.
"It has been next to impossible for the music industry to beat file-sharing via the legal route, as the legal process moves a lot more slowly than the file-sharers," said Mr Mulligan.
The music industry is desperate to beat them at their own game and has been inundating networks with spoof files to slow the systems down.
File-sharing has proved remarkably resilient and innovative and it is perhaps this that scares the music industry the most, said Mr Myers.
"The killer network, the Google of the peer-to-peer world, could happen next year," he warned.