History of Album Covers

An album cover is the front of the packaging of a commercially-released audio recording product, or album. The term can refer to either the printed cardboard covers typically used to package sets of 10" and 12" 78 rpm records, single and sets of 12" LPs, sets of 45 rpm records (either in several connected sleeves or a box), or the front-facing panel of a CD package, and, increasingly, the primary image accompanying a digital download of the album, or of its individual tracks.

The cover serves three main purposes:
1) To advertise and identify the contents of the music product.
2) To convey the artistic aspirations of the original artists (see Cover art and Alex Steinweiss).
3) In reproductions of the artwork, to serve as a primary image in the promotional efforts surrounding the product, as an identifiable image associated with it.

In addition, in the case of all types of records, it also serves as part of the protective sleeve.

Source:http://en.wikipedia.org/wiki/Album_cover

There is also plenty more detail and information into the theoretical and business plan behind an album cover. It also develops and describes the importance of aesthetics to the cover, whereby it is crucial to target a certain audience and attract as many people as possible.

Another important note would be:

With the increasing popularity of digital music downloading service and the inflating cost of conducting business, the purpose and prevalence of the album cover is evolving. While the music industry tries to keep up with technological and cultural shifts, the role that packaging (and thus the "album cover") will play in consumer music sales in the near future is uncertain, although its role is certainly changing, and digital forms of packaging will continue to surface, which, to some degree (and to some consumers) take the place of physical packaging. However, As of 2008 should be noted that physical music products, with a physical "album cover", continue to outsell digital downloads by a substantial margin.[5]

In August 2008, album cover designer Peter Saville, responsible for cover art on albums by New Order and Roxy Music, suggested that the album cover was dead.[6]

One digital solution is the iTunes LP format for interactive album artwork introduced by Apple on the 9 September 2009.

Source: http://en.wikipedia.org/wiki/Album_cover#The_album_cover_in_the_age_of_downloads

This shows how despite technology has progressed, the need and desire for people to have music and the art in their hand is still very important for most. Whilst admittedly software, as mentioned, such as iTunes is becoming increasing popular - it still isn't enough to disrupt the demand for a personal, and physical copy.