As of late, many conflicting reports are saying that altough iPod sales continue to rise, iTunes store music sales are decreasing. They go on to state that sales now are 65% lower than in January, with average transaction sizes dropping by 7%. I think this is really crazy. Why?
Apple never releases actual statistics of their iTunes sales. This means that analysts are trying to figure out the sales, and we all know the accuracy of doing that. Previously, Forrester released a report on these figures, but shortly after claimed that they had only taken data from 200 transactions. That is simply ridiculous.
Also, this is a format war. Companies selling physical CDs, such as Walmart and Amazon, are competing against digital music stores. As more people buy iPods, they see less and less of a need for buying physical CDs, which then require you to rip them. Then consumers have the problem of trying to rip copy-protected CDs, such as Sony's. It's simply much easier to go online, enter your credit card number, and buy a song. You can even preview it before buying, unlike most CD vendors.
Pricing is a key component as well. 99 cents per song is pretty reasonable, and in most cases the entire albums bought on iTunes are significantly cheaper than store-bought CDs. Everybody is trying to save money, and so the more affordable store will get the customers.
Lastly, iPod is closely tied to iTunes. Apple worked so hard at making a seamless fit, that few people even want to be able to sync their iPod with a third-party jukebox application. Along with iTunes integration, Apple made sure that the iTunes store was easy to use. They also made a very usable DRM scheme, which also attracts consumers. Using a third-party ripping tool for CDs is often annoying as their is no standard ripping tool. Apple made sure that iTunes was bug-free. Nowadays, you'll rarely find a glitch in the software. People don't want to waste their time trying to fix something.
So really, if you look at an average 20-year old kid, there's a high probability he'll have an iPod. And he'll most likely be buying his music from the iTunes store. The sales of CDs are usually to music pirates, or older people who don't want to jump on the technology bandwagon (yet).