Despite the failure of Paul McCartney and Mick Jagger to recreate their former glories in recent releases, as well as the failure of its relationship with Mariah Carey, EMI's share price has risen strongly since its profits warning in late September.

The basis of this looks like optimism that EMI can lift its profit margins back into the teens. However, this optimism may well prove unfounded.

A lot of faith is riding on the new chief of recorded music, Alain Levy, particularly given his record of doubling PolyGram's margins to 16 per cent in the mid-1990s. He has also indicated he can cut costs by more than the £65m a year EMI was already talking about. This will involve improving manufacturing and distribution efficiency, label reorganisation and presumably further job losses.

Yet simply cutting costs and expecting higher profits to flow underestimates the difficulties facing the industry.

EMI's restructuring will cost around £100m, and it is only five years since the last round of £100m restructuring charges across the industry. Since then, average margins among the majors have fallen from their mid-teens peak to below 10 per cent.

However, the profitability of the majors today is still well above the level of the mid-1980s, when most struggled for margins of 5-6 per cent. The implication is clear: the mid-teen margins of the last decade were the exception not the rule, caused by the introduction of the CD and some big mergers.

Ultimately music margins are likely to slide back to their historic levels.

The main reason for this is the desperate state of the music market. A stagnating market inevitably means greater competition for artists and market share, which increases A&R and royalty payments, and marketing spend.

With the boom caused by the introduction of the CD over, slower economic growth and increasing off-line and online piracy, the market is likely to fall again this year. On top of this, competition regulators have made further large mergers unlikely in the short term.

In the longer term, the industry is pinning its hopes on internet distribution to boost sales, remove the 20 per cent of the cost base accounted for by manufacturing and distribution, and end the problem of returns. This could allow margins of more than 20 per cent.

The dynamics of the business, however, suggest that long-term pressures are likely to shave margins to the mid single-digit levels of the past. Unlike the CD, digital distribution changes some fundamentals of the business which, despite the sales potential, are likely to prevent profitability from improving.

Reducing the need for physical manufacturing and distribution cuts the investment required. This should reduce the size of the financial risks the majors take. But the move online also reduces the artists' reliance on the majors. Most will continue to sign to big labels, but this change still implies a further shift in power from the majors to the artists and independents. With limited brand strength, the big labels can do little to resist this.

Despite gradual increases over the years, artists still only receive about 25 per cent of total revenues, leaving plenty more to push for. And because fewer than 20 per cent of artists ever make a profit, the profitable artists receive an even smaller fraction of the money that could be attributed to them.

At the same time, legal changes are also benefiting artists. As in football, it is getting harder and harder for content companies to tie the talent to long contracts, making it more difficult for labels to reap the rewards once breakthrough is achieved. This will get worse - despite the small sums so far involved, many artists are already disputing the use of their music for online distribution.

The major record companies are not going to disappear, and given the extent of their back catalogues, should always make good money. However, raising margins back to their peak may well take more than sacking staff and cutting costs.

As with McCartney and Jagger, to expect Alain Levy to repeat his former feats a decade on may be asking too much.

rickyj21@hotmail.com

Richard Jones is a former City investment analyst