Ever since the internet was used commercially more than seven years ago, the music industry has known that it would one day have to adjust to the new channel of distribution that the technology offers. For most of those years, the industry hid its head in the sand, refusing to meet the opportunities and threats of the new medium.

Last year, with the runaway success of Napster, the online service for swapping music files that began in September 1999, the record companies suddenly started to take the internet seriously, because only then did the net begin to pose a big threat to its revenues.

Copyright infringement has long been the bugbear of music publishers ever since dodgy printers started making illegal copies of sheet music in the last century. Each new medium on which music could be distributed has offered its own opportunities for piracy, from double-deck tape machines in the 1980s to CD-writers today.

With the internet, however, the industry was hit by a double whammy: when copies were made of older analogue media, the process of copying caused a deterioration in quality, adding hiss and crackle to the recording. This made copies less attractive. Digital recordings, by contrast, can be copied without deterioration because they are coded in a binary format that can be simply reproduced.

The MP3 format, used on the internet, allows for the encoding of digital music, and enables it to be compressed in a form that is easily distributed across computer networks. Thus, it creates a way for high quality copies of music to be made quickly and easily recopied, and for them to be swiftly and cheaply distributed around the world. The invention of MP3 was the music industry's nightmare come true.

Internet users were quick to pick up on the new technology. By early 2000, MP3 had become more popular than sex on the internet, as search engines reported that it had displaced X-rated material as the most popular subject for searching. And with Napster, people were discovering a service that allowed them to search each other's hard disks for MP3 files, and to swap them for free.

By far the majority of the files swapped using Napster were illegal copies, created by net nerds making MP3 files from their CD collections. Unsurprisingly, Napster was slapped with a series of lawsuits, which culminated this year in a threat to close the service unless it changed its technology to allow illegal copies to be removed and to charge its users for downloading music.

Napster, with 70m users, and now backed by Bertelsmann, insists it has gone legitimate and will create a paid-for MP3 service with royalty payments going to the music industry.

Napster will now compete with other legitimate file-sharing services, such as the reformed MP3.com and Wippit, of the UK.

However, the genie is out of the bottle as far as music-sharing technology is concerned. MP3 files cannot be stamped out, and Napster technology can be copied by less legally-compliant services - similar technology such as Gnutella and Wrapster has already proliferated across the net.

The big question for the record companies - and one that will not be answered for some time, until consumer patterns are established - is whether people will find services such as Napster cheap and convenient enough to discourage them from going to the bother of finding pirated material.

If most consumers on the internet do turn out to be lazy, the problem may be solved. Piracy will still go on, but at a much lower level than the Napster phenomenon represented.

As with other industries, the music world has always had to live with a certain level of fraud, and can continue to do so. But if the level of fraud is still found to be unacceptable, the industry has a few weapons up its sleeve, both legal and technological. On the legal front, the European Union's forthcoming copyright protection directive has been dubbed the most lobbied-over piece of legislation ever. The directive enshrines in law the principle that content owners can use technological means, such as digital keys or encryption, to protect their property. Tampering with the protection technology will be an offence.

Music companies will always be able to pursue copyright infringement cases through the courts, but will have to weigh up the expense and inconvenience of doing so. Instead, many see prevention as a better answer.

"Ultimately, the industry will have to come up with technical solutions to prevent copying," says Nick Gardener, partner at Herbert Smith, the law firm.

Initiatives within the music industry to find a copyright protection technology have so far borne little fruit. The much-vaunted Secure Digital Music Initiative, set up in 1999, has not even managed to set preliminary standards for digital watermarking technology, that tags pieces of music with a unique identifier. It seems to be difficult to get its 200-plus members to agree.

Perhaps because they do not need to seek widespread agreement, independent companies have been quicker to create protection technology. Conventional encryption techniques can just as well be applied to music files as any other form of content, but new technologies are also being developed that are more specific to copyright protection.

For instance, IBM has created a system of locks that will let a song to be copied and sent from person to person freely, but played only once by the recipient. Reciprocal Music in the US has offerings in digital rights management that let content owners collect payment.

Cantametrix has taken a different tack. Its technology establishes the 'DNA' of a song, its unique pattern, and is sensitive enough to detect tiny differences in illegally copied recordings. This can be used with file-sharing systems such as Napster to track whether pieces of music are being pirated, and prevent pirated pieces being distributed.

Netsertion, a British company, has pursued a similar idea, coupled with sophisticated internet search technology to seek out instances of pirated material.

Another start-up, SunComm, goes to the root of the problem, before music can be made into MP3 files in the first place, with its Sun-X Sentinel, that claims to put a lock on CDs so that their contents cannot be turned into MP3s.

As the music industry finally seems to have been galvanised into action to protect its property, we can expect it to consolidate around a few of these technologies in the next year. Meanwhile, music executives will also be watching eagerly to see whether the 70m users of Napster's free service will also prove susceptible to paying. If they do pay up, the industry will have found its new distribution model on the internet.