Only 5% of music downloaded is legal, according to a report by the International Federation of the Phonographic Industry (IFPI).
Generating value in an environment where 95% of music downloads generate no revenue is the biggest challenge for music companies, the report said.
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The recording industry copyright watchdog estimates that over 40 billion music tracks were illegally file-shared in 2008.
John Kennedy, chief executive of IFPI, said there is a momentous debate going on about the environment on which the music business depends.
Governments are beginning to accept that doing nothing is not an option if there is to be a future for commercial digital content, he said.
According to the report, governments around the world are starting to accept that co-operation from internet service providers (ISPs) is the key to the problem.
The Carter Report on Digital Britain, due out at the end of the month, is expected to recommend how the government can tackle online piracy.
The government brokered a voluntary co-operation agreement between the recording and film industries and the six largest ISPs in July 2008.
The Carter Report is expected to recommend ways of expanding and enforcing that agreement through new regulations.