For about the past year, record companies have been cutting back on new projects and even in some cases, cancelling all new projects all together. The result is that recording studios that rely on this kind of work have been closing in the UK at the rate of about one a month.

Despite this move to just concentrate on a few top acts, record companies have either seen a dramatic fall in profits, or have even suffered record losses. With the exception of BMG, all these firms are public companies and therefore under a legal obligation to make a profit. The fact that they have not done so is largely due to the after effects of a series of technological changes, combined with some poor managerial decisions.

The two main changes were the introduction of the CD and the introduction of the cell-phone. The record companies would have you believe that recordable CDs, MP3 and Mini-Disc players are the real villains. But these technologies are primarily marketed by Philips and Sony - both coincidentally record companies! Also we have been recording our favourite records onto cassettes (patented by Philips) since the sixties.

The cell-phone was the big hit with middle-class teens to twenties, the exact demographic group that accounted for most record sales. This and the Internet took spending money away from the music industry and helped fuel the recent technology boom.

But this lack of turnover with the young was completely masked by the flood of back-catalogue CD sales. The 35+ age group were repurchasing old recordings that many already had on vinyl and now wanted on CD. Most of this boom was in classic rock, The Eagles, The Doors, The Grateful Dead, Tina Turner, Roxy Music, Supertramp and above all the big three: Pink Floyd, Rolling Stones and The Beatles.

Soon, aged rockers were taken out of semiretirement from their ranches in Utah and Montana and their mansions in Surrey and their castles in Scotland to fire-up the old rock and roll machinery once again, but this time bigger and better than ever. Ozzie's midgets were on tour, pigs were flying over London and Berlin and Keith played cigarette and guitar at the same time.

Despite all the jokes about Zimmer-frames with guitar amps, the founding fathers of rock and roll were earning money for the record companies in a way that the newer acts appealing only to a younger audience could not. Pink Floyd performed 'Momentary Lapse of Reason' to 340 huge halls and stadiums and all were sold out. Tina's 'Wildest Dreams' tour did the same.

The new thing for the young was the artificially created vocal group and Take That, Boys to Men, The Spice Girls, Backstreet Boys and N'Sync had a handful of hits each. These acts had little musical ability and relied on a set format created by the same producers who had spent a life time creating similar sounds. Despite all the vapid hype, these acts lacked 'legs' and soon folded or passed into obscurity.

In many ways this was sad because many of them were very good singers and if they had been given a chance to develop their craft, might have turned into good musicians and in the long run have sold more records. Robbie Williams from Take That went back to basics, re-learnt his craft and is now one of the few young stars able to fill halls and sell records for more than just a few months.

But the record companies were still failing to reach the young. At the same time, older record buyers had all the back-catalogue they needed and Tina retired.

Inspired by reality television and the fact that in some countries the winners of 'Big Brother' had also been able to sell some records - and in Germany even reached number one - the music industry turned to television. 'Pop Idol' and 'Pop Stars' were born.

At last, the young were watching and buying records again. The emotional proximity of the fan to the artist was as close as it could get. Week by week, breathless fans tuned in to see hopes of stardom dashed or realised. Record sales topped a million for the first time in years.

But this generation of stars are far removed from the like of The Beatles or The Rolling Stones. These are not musicians who have spent decades learning their craft, these are young kids with nice voices who have been plucked from obscurity by the vagaries of a talent contest.

So where does this leave the record companies? The big three manufacturers Sony, Philips and Matsushita have already announced as far back as 1996 that they will replace the CD with the DVD by 2008, perhaps even sooner.

That will of course mean once again back-catalogue and old concerts are being re-released once again, this time on DVD. But here the biggest problem is that there are so few performances available. Most of the older big stars have only had two or three concerts filmed at a quality high enough to be released on DVD.

The economics of DVD are somewhat different. The capital outlay required to film several concerts with between six and sixteen cameras and combine them with the multitrack recording is far higher than recording a CD in a studio. Also postproduction costs are higher. The audio has to be mastered down to surround sound and the cameras are not live-switched like a TV programme, but each and every camera is recorded throughout the concert so that every fade and switch is perfect.

The making of modern video is often even more expensive, with virtual sets and 3D graphics by top designers. Some videos are more like film shoots with budgets running into hundreds of thousands. Experience has shown that pop-video DVDs do not sell as well as live concert videos.

All this means that the risks are higher and in turn also means that the record companies will be even more reluctant to bet on an act that is not already a proven major success.

At the same time, the big artists are demanding a bigger slice of the pie, which in turn pushes up prices for CDs and DVDs and also depresses record company profits on the very acts they look to for all their revenue.

If all that was not bad enough, there is a much more serious development taking place: artists are becoming their own record companies. Over half of all records sold are either from small independent labels or financed by the artists themselves.

And we are not talking about new acts or small-fry performers. From Martha Reeves to Madonna, the only action the record majors get is as distributors. Small acts are getting a thousand CDs run off for under a Pound each. Large acts are tying up international distribution agreements, or in some cases going through local distributors in each and every country. And Internet sales can be taken care of World wide by the likes of Amazon.

This leaves the record companies all dressed up, but with nowhere to go.

The question the industry is asking itself is 'What will they do now to survive?'

A record company is like a wholesaler. They carry a range of goods (artists) some of whom are cash cows and create most of their profits (big acts). But most are there to augment the collection and give the customer a fuller service (small acts). Some ranges a wholesaler carries are minority products that sell steadily but in small numbers and can be sold at high mark-ups (jazz and classical).

One question we have to ask is 'What happens when a wholesaler dumps large parts of his range to concentrate on his star product, the cash cows?'

Another, equally important question is 'If a wholesaler, faced with a downturn in trade, seeks to restrict his market share to cash cows, can he also reduce his overheads to reflect this downturn?'

For a record company to just try to weather the storm, waiting for better time to come, would be the same as putting their corporate head in the sand. Concentrating on cash cows is just not enough. The market is restructuring and they should have already restructured with it.

In 1998 Bertelsmann (BMG, Ariola, Def Jam) decided to throw everything at a multimedia, Internet-based, audiovisual future. Books, television stations, magazines and record divisions began a huge restructuring process that is still continuing today. The rest of the World shook their heads and assumed that they had taken leave of their senses.

Companies like Bertelsmann and AOL-Time-Warner are clearly looking for an overall synergy effect between all their divisions: film, TV, music, games, publishing and Internet. In national markets they are looking for deep penetration (TV coverage, pages of newsprint, sales) with few artists. In international markets they are looking for massive sales tied to films and/or games and high profile marketing campaigns.

The major players have clearly decided to leave the minority tastes to small companies that can cater to that kind of market. Should a local, up-and-coming band show the potential to become an international star, they can always buy them. It is cheaper to buy a proven hit - they argue - than to cultivate 10, 20, or even more acts in the hope that one of them will become a hit. More importantly, a major release can be done in weeks, rather than in years.

In the past, record companies used to have to sink large sums of money into releasing several albums from an act before it became a hit. With DVD and the need to sell worldwide, entry level and start-up costs are much higher. There is no way that a company can afford to release a DVD, without knowing that it will sell.

The pattern of things to come is already emerging. The large record companies, the so-called majors, will continue to dominate the international market and parts of the national markets. Often they will be working as marketing and distribution companies for stronger local labels, or for artists with the finances to record and manufacture their own DVDs or to have the majors perform the manufacturing for them on a commission basis.

The rest of the market will be covered by labels catering to local markets or minority tastes. The classic rock band and would be pop star will have to finance their first recordings themselves. The results will, in many cases, be fairly poor as too many will try to make their own recordings on cheap PC- and Mac-based systems targeted at the consumer. Starved of money, these independent releases will mostly flounder, no matter how good the artists behind them might be.

This anaemia of the exchequer will mean that independent releases will be largely shunned by radio and the record buying public. Not only will they find it very difficult to get air-play, but cheaply made videos will ensure that they get absolutely nowhere with the likes of MTV, VH1 and Viva.

But it is not all doom and gloom. Some smaller, independent labels are not as small and not as independent as they may appear to be. Some are getting larger and forming formal relationships with the majors. Some are investing real money in making videos for their top acts and some are even thinking in terms of large scale concert videos.

Although the classical gateway function of the majors disappeared a long time ago, things just may be getting tougher for bands that cannot raise substantial funds. But then, who said the music business was easy!