The Big Question: Is the crisis facing the music industry as bad as the big record labels claim?

What's the fuss and why should we care?

This evening in London's Earls Court the industry will gather for its annual jamboree, the Brit Awards, an evening given over to mutual back-slapping, self-congratulation and excess, shown live on ITV1. It will at least help the executives of the big four record companies (Universal, Sony BMG, Warner and EMI) forget about what's going on back at the office. Large parts of the "biz" are going down the tubes. Since 2001 the total European market for recorded music has lost 22 per cent of its value. This matters because the music industry, in its widest sense, is worth almost £5bn a year to Britain and, according to the British Phonographic Industry (BPI), its activities generate the equivalent of 126,000 full-time jobs in the UK.

So are we losing our interest in music?

Britain remains the third-largest market in the world for music sales. We also buy more music than any other country - four units per capita each year. In many ways, music itself has never been more valued by the business world, with marketers desperate to exploit its commercial worth. Mobile-phone manufacturers are scrambling to be able to offer users the chance to watch the best music videos on the move. Big brewers are pouring sponsorship money into live music venues and festivals in the hope that the feelgood factor of a favourite band will help to enhance perception of their brand. Advertisers have come to recognise the benefits of a recognisable soundtrack.

Yet the unstoppable advance of digital downloading means that the financial model on which the music industry has been built is crumbling. Hopes that legal downloads would compensate for the fall in sales of CDs were hit by a slowing up in growth last year. According to the International Federation of the Phonographic Industry global music sales fell overall by 4 per cent in the first half of last year despite the almost doubling of digital music sales (which accounted for around 10 per cent of total revenues).

Revenue generated by CD sales has not been helped by tumbling prices - half of CDs retail for under £10. Then last month at the Midem music festival in France, executives of the major record companies were convinced that the unthinkable was upon them - that they would have to accept the release of music online with no copying restrictions. What's more, the unsigned pop group Koopa made the top 40 in January with a self-released, download-only single.

Do we really need record companies at all?

Yes, we do. A report issued yesterday by the Association of Independent Music, which represents Britain's indie labels, showed that their sector had never been healthier. Of the 76 UK albums that achieved silver, gold or platinum status in 2006, 21 were on independent labels, a record proportion. The best-selling independent album of the year was The Arctic Monkey's Whatever People Say I Am, That's What I'm Not, which was released on Domino records and sold more than 900,000 units.

There is a still a role for the majors, who can harness unrivalled marketing budgets to drive the sales of mainstream artists. Supermarkets, which generate vast sales of CDs (though prices have fallen beneath £9), still prefer to restrict their shelf space to the music on the major labels.

What about MySpace and social networking sites?

Revolution is not too strong a word to describe the changes introduced by MySpace. There's no better example of this than Enter Shikari, a St Albans band who have been so successful in building support online that they have been able to shun all approaches from the record industry. In November, with a fanbase estimated at 40,000, they sold out the Astoria, one of London's best-known venues. By releasing singles on their own, as downloads, they are able to take a far higher share than if they had signed a contract. That said, the vast majority of bands marketing themselves on MySpace are not making any kind of living. Hence the emergence of other websites, such as sellaband.com and slicethepie.com, dedicated to helping unsigned bands to make money.

If bands cannot earn from sales, how can they survive?

Just as the industry is itself in turmoil, so the artists are having to rethink how they operate. That means a greater focus on live performance and gathering revenue from merchandising. The explosion in live rock festivals has helped to fuel a thriving live music scene in Britain, with more than 4,500 gigs taking place every evening. Yet there are concerns that this revenue stream could start to dry up if Britain follows America, where concentration of ownership of venues has seen a rise in ticket prices and falling attendances.

What does the future hold for the record companies?

Diversity is seen as the key to survival. Companies like Sony BMG are convinced that branching out into areas such as television, advertising and sponsorship will create new opportunities and potential earnings for its artists. The pop impresario Simon Cowell has been instrumental in creating this model, through his television production company Syco, which has a deal to give Sony rights to his artists, such as those who emerge from ITV's X Factor and other hit TV shows.

But as for traditional A&R roles, the majors are likely to take an increasingly less hands-on role, expecting the raft of new music management companies, such as Channelfly, the owners of the Barfly venues, Coalition Management and Courtyard, to come to them with artists that have already proven themselves to the underground.

So should we tune in to the Brit Awards after all?

In spite of the figures on the balance sheets, British music is doing rather well. No fewer than 14 UK debut albums made the Top 100 in 2006, compared to eight the previous year. UK artists also achieved 61.9 per cent of the Top 100 album sales last year, a figure not matched since 1997, when The Spice Girls and Oasis were still at the height of their popularity. Victoria Beckham might be starting her new life in California but the Gallagher brothers will be at Earls Court, collecting an award for Outstanding Contribution to British music. According to the BPI's chairman, Peter Jamieson, British music is "going through a truly outstanding period of creative success". He just needs to find a way of turning that creativity into more cash.

Has the digital revolution brought the music industry to its knees?

Yes...

* If artists are unable to make a decent living, British music will inevitably decline in quality

* Only major record labels have the budget to market music to the mainstream and make the megastars of the future

* Numbers of legal downloads are not generating enough money to compensate for falling revenues from CDs

No...

* The UK's independent music sector has never been stronger, and is producing multi-platinum selling artists

* Unsigned bands can grow fanbases on the internet with no need for record company support

* Other revenue streams besides album sales are growing, such as film soundtracks, television and sponsorship deals