Music giants EMI Group and Universal Music Group (UMG) sang a happy tune Thursday about recent sales, leading many investors and executives to wonder whether soaring song and ring-tone downloads are starting to lift the industry out of its long-playing funk.

"It's encouraging," says Pali Research analyst Richard Greenfield. "I don't think the business is completely out of the woods yet, but we are significantly better in 2006 than anyone expected."

Everyone's eager for good news. Companies shipped $12.3 billion worth of physical and digital recordings in the USA last year, down 0.6% vs. 2004 and down 15.9% from the industry's peak in 1999, according to the Recording Industry Association of America.

EMI shares rose 8.3% on the London Stock Exchange after it disclosed, in a preview of its official financial report due in May, that revenue rose 4% for the fiscal year ended March 31. That's EMI's first such increase in five years.

The company says that it was helped by a 150% jump in digital sales, which now account for 5.5% of sales, as well as solid hits from Coldplay, The Rolling Stones and KT Tunstall.

U.S. shares of UMG's parent - Paris-based Vivendi - were at $35.17, up 2.5%, after it reported that UMG's revenue jumped 8.4% in the first quarter, to 1.1 million euros ($1.4 million), vs. the same period last year. (The parent company on Thursday also officially shortened its name from Vivendi Universal.)

UMG's digital sales are up 146% this year, now accounting for 10% of revenue. Its hitmakers include Andrea Bocelli, Prince and Mary J. Blige.The upbeat music news also boosted Warner Music Group shares 3.9% to $24.41 - the highest price since it went public in May.

One reason for the growing optimism, Greenfield notes, is the leveling off in the decline of the number of CDs sold. They fell 8% in 2005 but were off only 5.5% in the first quarter just ended vs. a year earlier.

Meanwhile, the pace of digital downloads continues to rock. The number of digital tracks sold this year through April 16 is up 84% vs. the same period in 2005, according to Nielsen SoundScan.

Put another way, total album sales are up 3.6% if you meld physical CD, LP and cassette sales with what the industry calls "track equivalent albums" - a calculation that counts sales of 10 digital tracks as one album.

But it's too early to say whether digital sales growth will continue to outpace the decline in higher-margin CD sales. Disc sales are at their lowest in the months after Christmas.

"We are painfully aware that we are cannibalizing our core business," says Thomas Hesse, president of Sony BMG's global digital business. "It's something we need to do, but it's not clear to us when our industry will return to revenue growth."

Separately, executives also bemoan the absence of a music star popular enough to send millions of additional people rushing to buy CDs or downloads.

"We still don't have an Alanis Morissette or a Norah Jones selling 20 million units," says ZelnickMedia's Strauss Zelnick. "Will we again? Yes, we will."