For background, check out this article from Business Insider.
The music industry is down 64% from its peak.
The music industry is actually down 45% from where it was in 1973.
The CD peak was only 13% better than the vinyl peak, not over 250% better as the Bain chart implies.
10 years ago the average American spent almost 3 times as much on recorded music products as they do today.
26 years ago they spent almost twice as much as they do today.
The reasons for this decline in music sales are wide and varied. I'll first touch on a few obvious ones before I get to the main point - the rise of video (VHS, Cable and DVD), the rise of computers and the Internet, and the rise of gaming platforms (Playstation, XBox) are all battling for consumer attention. The decline of musical quality is another issue that I examined HERE.
Another reason that is often overlooked is the medium itself. Back when I was a teenage, my friends and I used to swap cassette tapes. In our spare time we would make mix tapes or record our favorite albums for each other. This was a great way to get new music while saving a few dollars that could be better spent on other pursuits. But even in those days, the copied music was deemed inferior to the original source. And it was - cassettes often broke and even the best players showed just how bad the cassette format was.
The digital revolution changed all of that. The CD was released to popular acclaim in the 1980s, but no consumer had the technology to actually copy them bit-by-bit. We still relied on the primitive cassette to do that. When Mindisc first came out, I leaped at the chance to buy into this second wave of digital recording (the first being the unsuccessful DAT format) because it was a great way to record my collection of rare 7" records. But the rise of the computer brought the inexpensive CD-R to the masses, allowing CDs to finally be perfectly copied.
After that, the MP3 came to the fore. File sharing (between P2P and friends) allowed the illegal distribution of music to an extent unimaginable in the past. This sudden easy access to music is certainly part of the steep decline in music sales. What consumer would buy an album or song when they could easily get it for free from someone else?
On a side note, the MP3 also seems to coarsen the appreciation of music. It makes the listener more "hits" orientated, ignoring the other songs on the album. This has a side-effect of declining the number of album sales since the modern listener prefers to just buy or share the "best" (or most popular) songs.
By coming out with the CD format, the music industry inadvertently created a path that is now leading to their own demise. They are struggling to stem the tide by the use of lawsuits and finally allowing legal downloads, but it may already be too late. Perhaps they would have better off staying with the cassette and LP!