Even before the Glastonbury Festival opened today, the doom-mongers had a field day. The celebrated music festival, which in recent years had sold out its 137,000 tickets in hours, still had thousands of places unsold - at £155 a throw.

A multitude of reasons emerged for the slow sales. First the row over the decision to invite rapper Jay-Z as the headline act, rather than a traditional rock or guitar act. Then there has been speculation about the effect of the economic downturn and memories of the rain-sodden mudbaths of recent years.

Most significantly, many believe there is evidence the booming market for music festivals has reached saturation point. By some counts, about 500 are taking place around Britain and Ireland, mainly over the summer. Festivals have also sprung up across Europe, attracting big crowds - including some Brits, who like the idea of paying less to see the same big-name acts.

Glastonbury spokesman Crispin Aubrey says: "There is more choice. But some of the other festivals have not done as well and may not survive."

Signs of trouble are mounting. One smaller festival, Blissfields in Somerset, due to be held in July, was canned this month because of poor ticket sales.

"The economy is so obviously hurting most people and even those still going to festivals may well have cut down on the number they are attending," said Blissfields in a statement. "This year in particular, there may just be too much choice and those who love festivals have nine major events on the same weekend as us in the South of England alone."

Another big festival in Scandinavia shut down abruptly, with a roster of acts already announced. "If even a relatively small festival collapses, it could be looking at losses of £1 million," says one manager. He forecasts more festivals will close.

For a bigger festival, the implications are more serious. Glastonbury would not break even unless it sold all but the last 5000 tickets.

The stakes are not just high for festival organisers. Musicians and record labels have been pinning their fortunes on festivals and concerts as their saviour. Sales of recorded music - CDs and downloads - have slumped to their lowest level since 1985. According to the industry body IFPI, 1.86 billion albums were sold last year. At their zenith in 1996, more than 3.4 billion were sold. Record-company revenues fell 8% globally last year, nose-diving 13% in Britain.

In contrast, live music has been enjoying a renaissance. There is some evidence that the MySpace and Facebook generation, who download so much music on their computers and iPods, get a greater thrill from a concert than buying a CD. There has also been the emergence of more wealthier, older punters, willing to relive their youth. Witness the reformation of everyone from the Spice Girls to Led Zeppelin.

Big corporate sponsors have wanted to get in on the act too - even if they are largely absent at Glastonbury, which has kept some of its hippy ethic. Mobile phone operators and drinks companies have been especially keen. For example, O2 helped to launch the Wireless Festival in Hyde Park, now in its fourth year and taking place next week, as a savvy exercise in brand-building.

This fundamental change in the balance of power in the music business has had a dramatic effect. Singers and bands have realised they can often make more money from concerts, festivals, merchandising and corporate sponsorship than through the dwindling sales of their recorded music.

So they have been striking deals directly with promoters - and bypassing the record labels. The two big companies to emerge in concert promotion are Live Nation, based in Los Angeles but quoted on the New York Stock Exchange, and AEG, privately owned by billionaire Philip Anschutz's firm.

LIVE Nation has generated the biggest headlines by signing up Jay-Z and Madonna, reportedly for between $150 million (£76 million) and $120 million each, in guaranteed long-term deals. Theoretically, this puts the concert promoter in a strong position - Live Nation, for example, is organising next week's 02Wireless, so it was easy to persuade Jay-Z to perform there as well as at Glastonbury.

This also means that some smaller promoters and festivals are finding they have less pulling power with big-name acts. And with so many festivals this year, promoters run the risk they are competing for the same middle-ranking bands as other events. Analysts say it's another sign there may be too many festivals.

But the brutal truth facing the music industry is that there aren't huge profits to be made out of live events. It's not just Glastonbury that doesn't turn a big profit. Margins are not so great at Live Nation, which is growing fast but made a small loss in the first quarter of 2008.

Mark Mulligan, music analyst at Jupiter Research, says: "There isn't enough money in live music to make up for all the disappearing revenues from recorded music."

Paradoxically, the situation at Live Nation illustrates that point. The company is not only organising concerts and merchandising but, as part of its 360-Degree Deals, it has also agreed to release a series of albums for its bigname signings. However, investors are highly sceptical, and Live Nation's share price has tumbled.

"It is clear that with Madonna and Jay-Z, Live Nation paid over the odds," argues Mulligan of Jupiter Research.

Fans gathered at Glastonbury tonight won't be worrying about that. But it's an anxious thought for a music industry still struggling to work out how to make fat profits again.