Material Girl's split with music label is a digital wake-up call

"It's been a mad couple of weeks," Radiohead frontman Thom Yorke posted in an online message following the landmark download release of their new album In Rainbows on Wednesday. There are reports of 1.2 million downloads on the first day.

The Radiohead experiment - fans can pay as little as they want for the download - is the latest digital innovation in the music industry. After years of executives fearing illegal file-sharing, now it appears to be the artists themselves who are making the traditional business model, and maybe even the labels themselves, obsolete.

It is a seductive theory, especially in a year when major artists have embraced alternative methods of distribution of their music and digital-only releases. Prince gave his album away with the Mail on Sunday for a cash payment and got huge exposure for his O2 arena dates, while indie veterans The Charlatans release their new album as a free download next year. The logic is that interest in the album will increase touring and merchandise revenue.

Sir Paul McCartney saw his sales increase after leaving EMI for the new Starbucks label Hear Music.

Yet Guy Hands, whose private equity house Terra Firma bought EMI two months ago, has not reacted to these developments with dismay. He described the radical move by Radiohead, another lapsed EMI act, as "a wake-up call which we should all welcome and respond to with creativity and energy".

His staff memo added that the music industry "has for too long been dependent on how many CDs can be sold" and has "stuck its head in the sand".

Despite the pervading gloom, it is important to remember that CD sales in the UK have been solid in recent years alongside the growth of paid-for downloads, which analysts say will be worth £600 million by 2012. High Street retailers have clearly suffered from the rise of downloads, though.

But it is only 2007 that has seen a marked downturn in the physical album market, with sales down 10.6% in the past year, although major Christmas releases by Kylie Minogue, Britney Spears and Leona Lewis could salvage the UK position. The BPI says the 58 million CD album sales in the first half of the year is actually a 32% increase on 10 years ago.

Other markets have had a more wretched time, with US CD sales down 20% in the first quarter, although it has recently picked up.

Generally, though, it is the perception of decline that has encouraged these new business models.

Radiohead's novel approach has won them massive publicity but, crucially, they will still release a standard CD of In Rainbows early next year once a label deal has been negotiated. The £40 deluxe box set should be a big Christmas seller, too, and the inevitable conclusion is that people still want to buy CDs and vinyl.

Only fledgling bands and those with a considerable fan base will, realistically, be able to flourish outside the label system. For newer acts who have global ambitions, the support of a record label is almost essential. The St Albans rock band Enter Shikari made the UK top five with their self-released album Take To The Skies in March. Tellingly, they have signed to Universal Music's imprint Interscope for their US campaign.

The other issue for artists is publishing rights: small and medium-sized acts who don't have complete ownership of their songs will find their publishers far from amenable to the idea of giving away music. The Charlatans currently control their copyright, while Radiohead have enough clout to negotiate a radical business model with their publishers.

Parts of the record industry have recently come round to the idea of free digital downloads without protective software, which will go down well with consumers.

Meanwhile, Hands has reportedly suggested EMI might subsidise the making of an album or fund a tour in exchange for a share in revenue.

If that amounts to a genuine investment in talent, the future may well be brighter than the doomsayers think.