Nielsen's 2008 SoundScan figures were released yesterday and they show greater physical losses, slowing digital gains and a net decline in revenue. In 2008, consumers purchased 88.8 million fewer CDs than they purchased in 2007. That's a 19.8% drop, far sharper than the declines in previous years. Brick-and-mortar retail continued to cut shelf space. Retailers staggered from the worsening financial climate. People continued to adopt digital music -- which often means buying individual tracks instead of albums.

But digital music gains are a small fraction of CD losses. Digital album sales increased 32% in 2008 -- a large percent increase, but a paltry gain in actual units. Only 16 million more digital albums were purchased in 2008 than were bought in 2007. Only a 16 million-unit gain in digital albums versus an 89 million-unit decline in CDs.

The revenue implications are incredible. Assuming a $10 CD wholesale cost (which is very conservative), about 127 million digital albums would be needed to replace the lost CD revenue. But consumers purchased only 16 million more digital albums, leaving a shortfall with a trade value of nearly $780 million.

What about the 27% increase in digital track sales? That was a unit increase of about 230 million tracks, which has a trade value of about $160 million. If you take $160 million away from the $780 million shortfall in album revenue, you're left with a decline of $620 million.

The revenue decline is not totally an issue of digital piracy. When consumers adopt digital music and gain the ability to purchase a few tracks instead of an album, revenues will be for the worse (as long as no more consumers become active music purchasers, which is the case here). While 73 million fewer albums were bought in 2008, 230 million more individual track downloads were purchased. If consumers are substituting albums for tracks, that means each album lost was replaced by the purchase of 3.15 tracks. Now, this type of format substitution -- on a massive scale, by active music purchasers -- goes a lot further to explain drops in revenue than does file sharing. The effects of piracy are hard to pin down, hard to quantify. Format substitution is right in front of our faces.