Downloads of music, movies and games hit an all-time high in 2012, whilst physical sales were down 18%.
In the past 12 months, over £1billion was spent on digital downloads in the UK.
According to the Entertainment Retailers Association (ERA), digital sales of music, movies and games grew by 11.4% during 2012, exceeding £1billion for first time.
Digital albums, films and games are now responsible for almost 25% of the market, although physical purchases still account for more than three-quarters.
High street and online sales of CDs, DVDs, Blu-ray and games dropped 17.6% last year.
Kim Bayley, director general of the ERA, said: "Breaching the £1billion barrier is an incredible achievement for the UK's digital entertainment retailers and reflects their huge investment in new and innovative services.
"At the same time, I suspect that many people will be surprised to learn just how resilient the physical business still is. Downloads offer convenience and portability, but people still seem to value the quality and tangibility of a physical product.
Despite downloads, however, there was still a market decline overall. Combined sales of music, video and games - across physical and digital formats - fell 12% in 2012 to just over £4billion.