For the recorded-music industry, as Frank Sinatra used to sing, it was a very good year.

After two years of flat sales and only modest growth in 1997, industry monitor SoundScan Inc. says U.S. music sales are expected to show a rise of nearly 10% in 1998 to a record 710 million units, with Sony Corp.'s Sony Music leading the market-share race.

The industry delivered acts that drew not only the usual audience of young males, but teen girls as well with everything from Sony's "Titanic" soundtrack to new heartthrob "boy groups" like BMG Entertainment's 'N Sync. And after years of overexpansion and bankruptcy-related closures, the music-retailing industry has stabilized and there is hope for growth from sales over the Internet.

Most impressive was the continuing growth of rap music, a genre whose demise some in the industry were predicting not long ago. Though there is less of the "gangsta" rap that drew the ire of social critics, more-melodic rap music with broader lyrical appeal has increasingly carved out its place as the predominant mainstream youth music. For the first time ever, the sale of rap albums, from artists such as DMX, Jay-Z, and Master P, are poised to outsell country music, even though that genre was boosted by new releases from superstars Garth Brooks and Shania Twain. And Viacom Inc.'s MTV video-music channel, which once treated rap as a sideline, is now fully embracing rap-music videos.

Cause for Anxiety

Of course, even as it celebrates the good news, the music industry has reason to be very skittish about the future. Despite the growth in the number of albums sold, a number of releases from sure-fire acts like R.E.M., Phil Collins and Seal haven't sold as well as expected. And the industry is also awaiting the after-effects of massive consolidation, including the dismissal of 3,100 employees following Seagram Co.'s Dec. 10 acquisition of PolyGram NV. Though the merger will create the world's largest music company, it will also result in a downsizing that could ripple through other companies. Seagram is seeking annual cost savings of $300 million and indicated those savings may come from dropping unprofitable or unpromising acts.

"The merger is the grandest act in a series of cost reductions over the past three years by all the majors," says Michael Nathanson, international media analyst for Sanford C. Bernstein & Co. "There are unhappy people in the music business because their world is changing, but for the people running these companies, it had to change. It's a move toward more fiscally conservative brand management."

Sony's Hit Parade

In leading the industry with a 17.4% share, Sony Music, under Chairman Thomas D. Mottola, showed it could find hits in a wide range of categories, from big-movie soundtracks to sugary pop to adventurous hip-hop singers. Sony got a fast start with the soundtrack to the blockbuster movie "Titanic." A largely instrumental record topped off with the ubiquitous ballad "My Heart Will Go On" from Celine Dion, the album, on the Sony Classical/Sony Music Soundtrax label, sold more than 26 million copies world-wide. A separate record by Ms. Dion, which included the same ballad, sold about the same number world-wide. Those numbers helped pump up Sony Music's operating income nearly 20% to $410 million for the fiscal year ended March 31.

"Titanic" was a big seller, particularly among women of all ages, but Sony also released a slew of records that drew America's bulging population of male and female teenagers. Sony's soundtrack for the Bruce Willis action film "Armageddon," packed with soaring classic rock songs, was a hit with young boys, the same purchasers of "Big Willie Style," the hip-hop-lite album from suburban rapper and actor Will Smith. Sony's Columbia Records label, which alone accounted for about 7.5% of all records sold in the U.S., released a teen hit from Australian duo Savage Garden and also had strong results with "Miseducation of Lauryn Hill," a hip-hop record that was a commercial as well as critical hit.

Critics question whether Sony's market share will look as good once "Titanic" sales fade, but its parade of hit records provides a war chest as it battles rivals to sign new hot talent. "We have the next wave of superstars," Mr. Mottola says, noting that Sony Music recently signed Latin star Marc Anthony and a Canadian singer named Lara Fabian. "We are going after the artist and producer deals. We are on them."

Rap's Growing Strength

The strength of rap-music sales can be seen in the growing market share of rap-focused labels. The Def Jam label of Seagram's Universal Music Group will finish the year at close to 2.5%, according to SoundScan; that is larger than the share of the pop and rock-heavy labels Island, Mercury, and A&M, all of which failed to get above 2% as of mid-December. Those three labels are also now part of Universal Music.

The real powerhouse is EMI Group PLC's Priority Records, which will finish the year with close to 4% of all records sold. The 12-year-old label founded by Bryan Turner released records by rapper-entrepreneur Master P and his New Orleans-based cohorts. Priority records were No. 1 on the Billboard album charts for four weeks this year, remarkable for a single rap label. That success has Mr. Turner doing what others aren't: hiring. "We are constantly getting new fans and customers for rap music," says Mr. Turner. From the layoffs at Universal, in the wake of the PolyGram deal, Mr. Turner says Priority is looking for "up-and-comers who slip between the cracks. We are aggressively hiring."

The big question is whether established stars can maintain their audience as new genres and styles appear. All executives are watching the progress of the new record by Whitney Houston, the diva of BMG's Arista Records, part of the Germany-based Bertelsmann AG empire. Released five weeks ago, "My Love Is Your Love" is her first studio record in years, but despite her star power, the album peaked at No. 13 and has slowly dropped each week since, to No. 23 as of last week.