According to market research company NPD Group, in the first quarter of 2007, Apple's iTunes Store has overtaken Amazon.com and Target to become the US's third largest music retailer with 9.8% of all music sales. Apple counts 12 track sales as equivalent to one CD sale, meaning that the company is responsible for nearly 21 million of the quarter's 212 million CD sales.

Wal-Mart, with 15.8% market share, and Best Buy, with 13.8%, were the largest and second-largest music retailers this quarter. What's fascinating about these results is that none of these outlets represents what would have been considered a mainstream music retailer even five years ago. The iTunes store comes closest to being a deep-catalog music retailer, even though it doesn't stock physical product—Wal-Mart and Best Buy both carry an extremely selective inventory of titles.

Overall recording sales so far this year are down about 16% compared to 2006, according to Neilsen Soundscan, although it reports that digital tracks sales are up by 49% over the same period last year. We're not sure exactly how Neilsen Soundscan reckons this, but according to its calculations, overall sales—including album sales, downloads, and "other formats"—put the year-to-date figures up 14% over the same period in 2006.

That means that physical media sales are sagging, and the only good news for the beleaguered music industry is coming from the "digital" part of the market (in market-speak, "digital" distinguishes downloads from the "physical" product represented by CDs, SACDs, and "other formats").

NPD Group attributes the surge in iTunes Store sales to a strong sales quarter for iPods, but we think they may be confusing correlation with causation. ITunes Store sales have been growing steadily as, yes, the iPod product base has grown, but also as people become more comfortable with buying downloads, and, perhaps most importantly, as traditional music outlets, such as Tower, have disappeared.

Apple should also get credit for its canny merchandising of the iTunes Store's wares, making many tracks available for free, offering unique tracks, and podcasting artist interviews and promotions. Surely we're not the only folks receiving weekly announcements for New Music Tuesdays?

One indication of how well the iTunes Store is doing is Apple's domination of the download market. Over 86% of music is still sold in a physical format, which means that Apple's 9.8% share of the market represents more than two out of every three downloads sold. How do you like them Apples?