LONDON - Alain Levy, the former head of EMI's recorded music business, caused a stir last year when he told an audience at the London Business School: "The CD as it is right now is dead."

Digital enthusiasts predicting the CD's demise were heartened over Christmas when a host of retailers said declining CD sales had hit profits over the crucial sales period.

With the likes of Woolworths singling out specific titles that had caused it to miss sales forecasts, the future of the format did appear to be in doubt.

The explosion in the popularity of digital music over the past two years has been deemed the culprit for the CD's woes. The stunning success of Apple's iPod and the increasing number of mobile phones designed to play digital music have already accounted for the clunky discman.

With the music press full of stories about bands like Gnarls Barkley and Koopa riding up the charts on songs available only via digital download, the CD looks set to be heading the same way as its predecessor, the cassette tape.

Digital music sales nearly doubled to US$2 billion ($2.88 billion) last year, according to the International Federation of the Phonographic Industry (IFPI), despite the overall market for music declining around 3 per cent for the second consecutive year.

Yet it is important to pause for breath amid the euphoria over the success of digital music and consider that CDs still constitute 90 per cent of the industry's sales. Despite the surge in online activity, UK album sales topped the 150 million sales mark for the fourth consecutive year in 2006, declining only 2.5 per cent.

A spokesman for the British Phonographic Industry said: "The CD is the most durable format on the market. It has been with us for 25 years now and is certainly surviving in an era when consumers are getting more digital."

Despite the hype around digital music, the CD remains the dominant format. IFPI chairman John Kennedy said that in 1996 some analysts had predicted there would be no CD factories in operation in 2006, a forecast that had proven to be rash.

Ironically, the growth in e-commerce has benefited the old-fashioned CD, with music lovers using a host of sites to source cheaper CDs.

Simon Fox, the chief executive of HMV, said Take That's greatest hits album had proven to be the second-fastest selling CD of all time in the UK.

"The CD is not dead and we will find a number of ways we can compete in the digital space," he said.

Independent labels have been one of the big beneficiaries of the online surge. Alison Wenham, chairwoman and chief executive of the independent music trade body AIM, said that digital distribution helped solve the problem of getting independent music into high street shops.

However, Wenham sees a strong future for the CD due to the integrity of the album format. "There are different types of music buyer, from the casual fan to the anorak. For those of us in the middle, there is still a desire to buy an album to capture an artist's body of work in a CD collection. That is not the case with disembodied tracks downloaded over the internet," Wenham said.

Mark Mulligan at Jupiter Research noted that the singles market has been decimated by the digital trend, but album sales benefit from single-track downloads as consumers get a taste of an artist's work and then invest in an album if they like it.

The CD market is also likely to be held up for now by older buyers. Wenham said music fans over a certain age were more likely to invest in an expensive sound system and cherish the artefact of a CD.

"For older buyers, there is nothing better than sitting down in front of the fire with a CD booklet of something you just bought," she said.

Yet analysts remain cautious over the format's long-term future. Jupiter's Mulligan said: "It is absolutely not dead, but it is not a healthy prognosis." He predicts a 5 per cent decline in the CD market every year for the next five years.

Mulligan said that for children weaned on file sharing and free music downloads, the sense of ownership is greatly diminished.

"Looking a generation ahead, there are serious questions over the physical format," he said.

Yet for now the CD remains popular even among savvy youngsters. In the UK, 75 per cent of internet users said their preferred format was the CD - even among 16- to 24-year-olds, this figure was 58 per cent, according to research from Nielson/NetRatings.

The research found people liked CDs because they could use them in many different music systems, they could keep a physical collection, they would be less likely to lose them and they liked lyric sheets and cover art.

The challenge is for music companies to invigorate interest in the physical format by sprucing up the dowdy CD while also facing up to the structural shift within the industry as more music moves online.

One way to stimulate physical music sales is to package existing music in more exciting ways. More and more music labels are unearthing unreleased tracks or concert footage of artists to repackage classic albums.

- INDEPENDENT