UPDATE 2-Downloads king as iTunes tops U.S. music retailer

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By Adam Tanner and Scott Hillis

SAN FRANCISCO, April 3 (Reuters) - Online music purchasing marked a symbolic milestone when Apple Inc (AAPL.O: Quote, Profile, Research) announced on Thursday that its iTunes music store had surpassed Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research) to become the largest U.S. music retailer.

Industry analysts have long expected downloaded music to eventually replace the compact disc, but said the significance of Web delivery overtaking physical goods in the music business is a harbinger for many other industries. Books and videos are rapidly moving in the same direction.

"People have long talked about the shift to digital music sales but this seems to be a symbol it is actually happening," said Steve Knopper, a Rolling Stone magazine music business reporter who is writing a book on the music industry in the digital age.

Apple's acknowledgment of its growing market share, came on the same day that News Corp's (NWSa.N: Quote, Profile, Research) MySpace social networking site said it had formed an online music venture with three record labels, posing a new challenge to iTunes.

Apple said its announcement was based on consumer data collected in January and February by market research firm NPD that counted 12 songs being equal to one CD.

"It underscores a very important trend in the industry," said Michael Gartenberg, vice president and research director at Jupiter Research. "It wasn't that long ago that Apple was proud of the fact that they were No. 4 and rising and (then) No. 3 and No. 2."

In February, NPD had said iTunes overtook major retailers Best Buy Co (BBY.N: Quote, Profile, Research) and Target Corp (TGT.N: Quote, Profile, Research) in 2007 to become the No. 2 U.S. music seller.