IT has been an unhappy few years for the music industry, hit by plummeting CD sales and rampant online piracy. But there are signs that the worst may be over — research suggests the industry grew last year and is finding new ways of making money.

Music brought in £3.6bn to the British economy last year, growing by 4.7 per cent, according to a report from PRS for Music, the payment collection body for musicians, songwriters and publishers.

The sale of CDs, which took another blow after the closure of several high street retailers such as Woolworths last year, may ultimately be sidelined as live music becomes the main breadwinner for most bands.

Sponsorship deals between big businesses and musicians are also becoming more important as bands and their managers look for new ways of making money from a shrinking pie, said the report.

Will Page, chief economist at PRS for Music, said the money from the licensing of services such as music streaming website Spotify to big sponsorship deals was more important to the music industry than ever, making up 25 per cent of its revenues, up nine per cent on last year.

“It's not just about the Armageddon sales figures, the industry is becoming much more diversified,” he said. “Revenues from business now make up a quarter of the overall pie, but whether this is enough to make up for the fall in CD sales remains to be seen.”

The marriage of convenience between music and brands is nothing new — Michael Jackson set the trend with a $5m partnership with Pepsi in 1983 — but new deals now account for £89m of the industry's overall worth.

The way brands are working with artists is changing too. Advertising campaigns are more inventive and look to harness the power of the internet, with companies such as chewing gum brand Trident partnering with pop star Beyonce, organising a “flash dance” of 100 women dancing to her recent hit, Single Ladies, in the hope that people would share the video on YouTube.

Some bands have gone even further. Last year, electronic act Groove Armada left Sony to strike a deal with drinks brand Bacardi. As well as releasing all new music through the company, they featured in its international music events throughout 2008.

— The Guardian, London