Two weeks ago a US market research company caused a panic in the music business when it reported sales of MP3s had declined. DRM has all but disappeared from digital music, while music catalogs and retailer choice have grown… and yet the volume of digital song sales fell. Ironically, it’s the major labels’ darling Spotify that’s bearing the sharp end of the backlash.

Two thirds of people don’t download unlicensed music at all, it’s a minority pursuit. But that “honest” mid-market is not only losing the habit of buying CDs, it hasn’t acquired the habit of buying digital songs either. NPD found that between 2007 and 2009, about 24 million Americans stopped paying for music in any form.

The number paying for digital song downloads fell year on year in 2009, the analysts estimate, by 600,000 to 34.6 million. None of this is particularly surprising – and gives impetus to the call that the music business start treating the public as customers again.

But what really put the cat amongst the pigeons was a comparison between free streaming services such as Spotify and on-demand radio services, such as Pandora. Spotify is the major labels’ darling: they invested in it, hold potentially lucrative shareholdings, and gave it preferential royalty rates to get it off the ground. Yet when people joined a streaming service it led to a 13 per cent decrease in paid downloads. Interestingly, NPD found that paid downloads by Pandora listeners increased 41 per cent. Why the difference?

“More listening just means more listening and tends to lead to less purchasing,” reckoned NPD’s Ross Crupnick.

Spotify wasn’t mentioned by name by Crupnick, it hasn’t yet launched in the US, and NPD only looked at US consumers and services. It should also be noted that Spotify has a “paid” option, as well as a link to purchase downloads. Yet, as we revealed last year, the conversion rate from free to paid was a third of what Spotify was boasting.

One major label refusenik is showbiz veteran Ed Bronfman, who runs Warner Music: he’s wary of cannibalisation and suspicious of rival Universal constantly talking up its investment in Spotify. NPD’s research has given him the ammunition he’s been looking for.

The argument for free streaming services is that they bring people in from pirate territory, a more subtle form of “behaviour change” than hitting them over the head with a hammer. This is the case put by We7, which targets a young demographic. But for hardcore music fans, who were pretty happy buying CDs in big numbers, Spotify gives them every justification for spending money on something other than music. Maybe the roof needs fixing.