Spending on downloaded films, music and games hit £1bn for the first time in 2012.
Digital download sales increased 11.4% last year, meaning a quarter of the entertainment market is now digital.
The figures come as retailers are expected to report a big drop in physical sales of CDs, DVDs and video games, which fell 17.6% in 2011 said the BBC.
Physical entertainment retailers such as HMV and Game have struggled over the past year as the rise in popularity of digital downloads has put pressure on the sales of the physical products.
But the Entertainment Retailers Association director-general Kim Bayley said breaking the £1bn barrier was an “incredible achievement” for retailers.
“This reflects their huge investment in new and innovative services - which means you can buy music, video and games literally at any time of the day and wherever you are.
“At the same time I suspect that many people will be surprised to learn just how resilient the physical business still is - with three-quarters of entertainment sales still on disc.
“Downloads offer convenience and portability, but people still seem to value the quality and tangibility of a physical product.”
More than half of the digital sales went on video games, which jumped 8% to £552m. Films and music took a smaller share of the digital market but recorded sharper growth, as downloaded films increased 20% and music 15%.