The recording industry's salvation no longer lies in digital music alone. Instead, based on market dynamics at play in the United Kingdom, revenue diversification appears to be the key.

According to IFPI, the total trade value of U.K. recorded-music sales fell 11% in 2010, similar to the 10% decline experienced in the United States. But the composition of two markets differed markedly, with U.S. physical and digital sales almost evenly split at 49%, while U.K. sales were 67% physical and 25% digital. (Performance rights accounted for the remainder in both.)

Still, the U.K. experience, as outlined by a study released Aug. 4 by London-based collecting society PRS for Music, still holds lessons for the United States and other markets.

In its annual "Adding Up the U.K. Music Industry" report, PRS quips that Adele's runaway success this year is both welcome and worrying because 21, the United Kingdom's top-selling digital album of all time, has accounted for a disproportionately large portion of U.K. music sales.

The risk of relying so heavily on one thing for success is one of the broader lessons that emerges from the report. Diversification is paramount in the digital music era?labels simply can't survive on digital music sales alone.

The importance of diversification becomes clear when you consider how music's "wallet share"?its share of overall consumer expenditures?has changed during the last decade. PRS estimates that recorded music's wallet share in the United Kingdom hovered around 0.33% from 1997 to 2001 before beginning a sharp fall to an estimated 0.13% in 2010. At the same time, live music's wallet share has risen from 0.05% in 1997 to an estimated 0.15% in 2010.

PRS also highlights the growing importance of business-to-business spending on music. Consumer expenditures on music, as reflected in the estimated amount spent on live music and U.K. recording industry trade group BPI's estimate of the retail value of recorded-music purchases, fell 6.6% in 2010 to £2.7 billion. But B2B spending on music (which includes performance royalties, advertising and sponsorship revenue, synch licensing fees and other secondary revenue streams) rose 2.6% to £1.1 billion.

Looking just at record labels, B2B revenue, some of which is new to them thanks to multirights deals, rose 7.2% to £218 million last year.

"Artists and managers are utilizing direct-to-fan tools more, plus they are now able to make better make-or-buy decisions as to what services they acquire and what they can do themselves," PRS says in its report. "This internal competition is forcing the labels to advance their offer in terms of products, services and expertise."

To put this trend in the context of digital music, look at it this way: Consumer spending on digital downloads accounted for the vast majority of digital music revenue early on, but as new platforms and business models have evolved, much of the growth is coming from other sources.

In other words, growing B2B spending on music has gone hand in hand with revenue diversification. Case in point: PRS estimates that the B2B revenue and digital trade revenue of U.K. record labels totaled 41% in 2010 and predicts that physical sales of recorded music could, for the first time, account for less than half of label revenue in 2011. As CD sales fall, growth in B2B spending will be vital to stabilize revenue.

When it comes to music-related advertising and sponsorship revenue, digital platforms are playing an increasingly vital role. According to data cited in the PRS report from music consultancy Frukt, U.K. music-related advertising and sponsorship revenue totaled £93.6 million in 2010, of which live music was the largest category, accounting for 35.1%. Spending on music advertising and sponsorships through digital channels accounted for a relatively small 7.8% of the total. But the category enjoyed the fastest rate of growth, surging 16.3% to £7.3 million. "Brands in the U.K. continue to utilize this as a core communications channel," PRS says, "and, with so much music consumption happening online, it's a natural space for brands to sit."