Music and games retailer HMV has clinched a deal to boost its digital music business, and reported rising sales figures ahead of the crucial pre-Christmas period.

It has snapped up a 50% stake in 7digital for £7.7m in cash from its venture capital backers, Balderton Capital and Sutton Place Managers. The digital media firm, set up in 2004, has developed technology for music streaming and downloading, and also owns a catalogue of 6m music tracks.

7digital currently provides services for Spotify, Last.fm and major music labels and artists, and is working on a mobile entertainment download application for BlackBerry smartphones.

HMV plans to use 7digital's technology to power its digital services, including an e-books store for its Waterstone's arm.

Simon Fox, the chief executive, said the deal brings HMV much-needed expertise and technology. "It gives us a serious seat around the digital table. It takes us a long way further down the track," he said.

The deal comes as a fierce debate rages over how to stem online piracy, with business secretary Lord Mandelson proposing that persistent filesharers have their broadband connections cut off.

Fox said: "As government, ISPs and the music industry are now seriously working together on measures to restrict illegal downloading, now is the right time for HMV to invest in digital entertainment."

HMV has benefited from the collapse of rivals Zavvi and Woolworths and posted a 1.7% gain in like-for-like sales in the UK and Ireland in the 18 weeks to 29 August.

The company has grabbed market share in all areas, helped by its loyalty card. Its sales of games were down 9% against a 40% slump in the market; and its music and DVD sales are growing by double digits, again outperforming the market as a whole. In games, customers can try out new releases before buying, and trade in old games for new titles through its Re/Play service. Waterstone's posted a drop of 3.4% in like-for-like sales, mirroring the decline in the book market.

Fox said: "It's a pleasing start to our financial year in what is undoubtedly a tough consumer environment. We're in good shape to approach the Christmas trading period." He added: "The reason for our confidence going into Christmas is the quality of the release schedule rather than the economy."

The entire remastered Beatles catalogue is out next Wednesday, coinciding with the launch of a new videogame, The Beatles: Rock Band. Waterstone's also has a strong lineup of new titles: the latest book from celebrity chef Jamie Oliver, Jamie's America, was published this week, with Dan Brown's The Lost Symbol – his first novel since The Da Vinci Code – due out on 15 September.

HMV plans to open between 10 and 15 temporary stores for Christmas, hiring 2,000 extra temporary staff. "We are approaching a Christmas which for the first time will not have a Woolworths or indeed a Zavvi on the high street," said Fox. "There are a number of markets where our existing store base won't be able to cope with the demand that we see."

Committed

Fox dismissed suggestions that he could be jumping ship to become the next head of broadcaster ITV. "I'm completely committed to staying with HMV. There's a big job to do here which I'm thoroughly enjoying," he said.

Asked whether he would rule out moving to the helm of Marks & Spencer should headhunters for the retailer come knocking, he said: "It's all so ridiculously hypothetical. I think all I can say is, I am really happy where I am and that is the current situation. But who can say what might happen in one or two or five years' time. But right now I am very happy doing what I am doing."

HMV's share price slipped back following the trading update and was down 2.79% to 111.50p at close. Analysts cited concerns about weakness in the international business and at Waterstone's. But John Stevenson at KBC Peel Hunt highlighted a "strong performance" for the core UK business. "The rate of sales transfer from the collapse of Zavvi and Woolworths seems to be better than our assumptions at this point, and this bodes well for peak trading," he said.

HMV has teamed up with Curzon to launch a three-screen digital cinema in Wimbledon in October. It also has a live music venture, which has relaunched The Garage in Islington in north London.

While HMV's online sales are growing faster than store sales and now make up 8% of the total, Fox believes shops will always have a role to play as a place to browse and for impulse buys. "It is reassuring that our store business is continuing to grow," he said.

The international side of the business is still struggling with like-for-like sales weaker than expected, down 12.6%. Fox highlighted problems in Canada, which where HMV is still primarily a music business. "We continue to change the mix away from CDs into iPods, band merchandise and games," he said.