Streaming music revenues surpassed income from the sale of traditional formats for the first time last year, as the booming popularity the service puts the survival of the CD at risk.

Revenue from music fans paying for services such as Spotify, Apple Music and Amazon Music surged more than 41% to $6.6bn (£4.7bn), accounting for more than 38% of the total global market for recorded music. The sale of physical formats, primarily CDs, fell 5.4% to $5.2bn to account for 30%.

It marks a tipping point for the music industry, which has depended on income from CDs to fill record labels’ coffers and artists’ pockets since the 1980s.

CD sales have been in decline for years as the industry was hammered by illegal piracy and failed to make much money as user numbers and margins fell in the early days of streaming.

Global recorded music revenues enjoyed a third straight year of growth in 2017, up 8.1% to $17.3bn, but industry executives immediately went on the attack, criticising YouTube for not paying a fair share of royalties.

Frances Moore, the chief executive of the music body IFPI, said the industry was only just getting back on its feet after 15 years of decline.

“The race is far from won,” she said. “There has [only been] three years of recovery. There is a structural fault in the market, a mismatch between what user-upload platforms are making from music and what they are returning to rights-holders. Until that is fixed there will always be a struggle to keep growth in the marketplace.”

YouTube, which is owned by Google and has an estimated 1.3 billion users who regularly watch music videos, paid $856m in royalties to music companies last year – an estimated 67 cents per user annually. Income from the 272 million music fans who use paid for and ad-supported services such as Spotify, generated $5.57bn in royalties, or about $20 per user annually.

“We are still only two-thirds of our peak size in 1999,” she said. “Our future should look good but it requires full and fair value for music.”

A memo leaked last year from Steve Cooper, the chief executive of Warner Music, home to acts including Ed Sheeran, Bruno Mars and Dua Lipa, said its new deal with YouTube was so one-sided that it couldn’t be called a “free market, willing buyer, willing seller” negotiation.

Record labels and artists in the UK earned more than double the royalties from the sale of 4.1m vinyl records than they did from the 25bn music videos watched on YouTube last year.

Total digital income – from streaming subcriptions, downloads and ad revenue around videos – grew 19% to $9.4bn to account for 54% of global revenues for the first time last year.

The IFPI also expects the explosion in the popularity of products such as Amazon’s Echo smart speakers and Google Home – where asking for music to be played is one of its most popular uses – to fuel a further boom in revenues.

Ed Sheeran was the biggest global recording artist in 2017, and topped the digital single sales chart with Shape of You and the album chart with Divide.

Stu Bergen, the chief executive of Warner Music’s international business, said Sheeran’s tour of New Zealand was so successful that an estimated one in 19 of the country’s population saw him perform, breaking a record set by Dire Straits 32 years ago.

Bergen said the way that digital services have democratised music discovery by fans and opened up emerging world markets such as India, China, the Middle East and Africa means the industry has plenty of scope for growth.

“We are not getting complacent, it has been hard fought to get here after 15 years of decline but there is still plenty of room to grow,” he said. “We’re well aware that the next global superstar could just as easily come from Sao Paolo as Suffolk. We estimate that only half the world’s population live in a thriving music market, and we want to bring the streaming revolution to everyone.”

A YouTube spokeswoman said: “In the last 12 months alone, YouTube has paid out over $1bn dollars to the music industry, just from ads, and that number is growing year over year due to the licensing deals we have in place with the overwhelming majority of labels, publishers, and collecting societies.”

Top five global recording artists in 2017

1. Ed Sheeran

2. Drake

3. Taylor Swift

4. Kendrick Lamar

5. Eminem