The Global Recorded Music Market Forecast report from Strategy Analytics claims consumer spending on CDs will drop from $3.8bn (?2.35bn) in 2010 to $2.7bn (?1.67bn) in 2012.
Against this, it projects digital revenues will grow to $2.8bn (?1.73bn) next year.
The digital business will be dominated by single-track sales until 2015 according to the report. It forecasts individual track sales will account for 29% of the market then while digital albums will make up 32%. Alongside this, subscription-based services will hold 14% of the market.
Strategy Analytics director of digital media research Martin Olausson said, "Digital music is not developing as fast as expected. While online revenues will expand further over the coming years, the overall size of the recorded music industry will continue to contract as record companies struggle to identify growth strategies."
Senior analyst Jia Wu added, "Music companies must look beyond download-to-own for digital revenue growth. With rapid adoption of connected devices and ubiquitous broadband, music fans will expect greater flexibility and wider consumption choices."
The report comes as the IFPI's global figures for 2010 indicate the start of a slow down in digital sales. While digital now accounts for 29% of labels' income around the world, growth was just 5.3% in this sector last year.
It added that US digital sales only grew 1.2% in 2010. The story in Europe was more encouraging, with digital sales rising 21.6% in the same period.
Two recent studies have delivered bullish projections for the digital music market, both regarding mobile as central and seeing Asia as a region brimming with growth potential.
ABI Research suggests there will be 161m mobile music subscribers by 2016, but stated that copyright holders must first drop their licensing rates so services can offer low-cost subscription packages in order to hit critical mass.
Juniper Research, meanwhile, was even more forthright, suggesting that mobile music subscriber numbers will pass 178m globally by 2015.