It might just be that there's a side to Guy Hands that, so far, has yet to be represented in the reports about his takeover of EMI. As the beleaguered record company attempts to manage a freefall in morale, you find yourself attempting to squeeze out a teaspoon of sympathy for the venture capitalist from Terra Firma. In these difficult times for the music industry, Mr Hands's business acumen surely can't hurt, can it? Well no. But without an understanding of the main commodity - musical talent and the egos and insecurities that go with it - EMI's new owner has landed himself a far bigger task than he may have imagined two months ago.

But he must surely be learning fast. Radiohead and Sir Paul McCartney have left EMI. Robbie Williams and the Rolling Stones appear to want out. Coldplay are said to be closely watching the situation. Only superannuated metal relics Iron Maiden have taken the opportunity to assure everyone that they would be pledging their support to the company - a declaration that sounded suspiciously like a plea for mercy from the new regime.

At Mr Hands's recent powerpoint presentation to staff, sources say that the frosty reception was accentuated by the half-hearted applause of “maybe four or five people at the front”. Nevertheless, once you had decoded the corporate jargon it was hard to deny that Mr Hands's presentation touched on a few key truths. In words that will surely have tumbleweed of portent blowing through Iron Maiden's tresses, he said: “One of the issues we will be addressing is the sheer size of our roster. In the past, we have followed the industry model of signing up as many artists as possible, while taking huge bets on a few.”

Big labels have been working to a business model left over from the days when even their unsuccessful artists could expect to sell 50,000 copies of an album. These days, any singer-songwriter who shifts that amount is doing well. But major labels still like to invest big if they think they stand any chance of recouping that investment. Once a band makes it, the label maximises its profit, preferably by making them tour one album for three years rather than having them release two more, potentially unprofitable, albums annually. But CD sales are in such decline that even this way of doing things doesn't work.

Whatever anti-piracy measures a record company implements before an album's release, people can still get a decent counterfeit copy from illegal file-sharing sites. Once, the enemy was the T-shirt vendors outside the venues or the record fair bootlegger. Now, by selling freshly burned official “bootlegs” as soon as a gig has finished (usually £15 a throw), the companies are moving in on this patch.

The music industry knows it needs a new business model. The current buzzphrase is the 360-degree deal, the direction that EMI is likely to take. Instead of record companies just making recording deals with artists, a 360-degree deal is one in which the label gets a share of the more lucrative merchandise and tour revenues. Whether it is resourceful or mercenary, Mr Hands will tell you that an extant business is better than no business at all.

Budding artists looking for their big break, need to ask themselves what they feel about this stuff before crossing the corporate threshold. They also need to ask what do they want? Fame - or merely the chance to get their music heard, without the ego-fluffing paraphernalia that goes with it? If Simon Cowell can be said to have had one genius idea in his life, it's to realise that, at their crudest, big record companies are stardom brokers - milking the novelty value from a never-ending stock of fame-hungry young singers. And as long as people want to be pop stars, these labels will adapt, not disappear.

Perhaps that's how EMI will proceed: as a fame factory. But if it did it would lose something important. The reason to sign the money-spinning pop acts - if necessary, on 360-degree deals - is that they help to subsidise the acts that set a label apart as an art-based enterprise rather than a run-of-the-mill company.

In the 1960s, Polydor had both James Last and the Velvet Undergound. In the 1980s, Columbia had both Bros and Leonard Cohen. What is Mr Hands going to do with prestigious loss-leaders such as Kraftwerk, who for 20 years have been turning up to their Düsseldorf studio to work on material that may never see the light of day?

On any big label, there are artists that are kept to show other would-be musicians that this is a good place to be creative. Mr Hands's PR gaffes have been bad enough, but when key EMI staff such as the CEO Tony Wadsworth - arguably Britain's most proven nurturer of musical talent - start to walk, a tough job becomes almost impossible. (At Mr Wadsworth's leaving party earlier this week, Radiohead revealed their allegiances by showing up.)

Once a big company loses those acts, it also loses any remaining reason for new artists to consider signing with it. That's why artists are already turning to smaller labels to manage their music. Domino - home to Arctic Monkeys and Franz Ferdinand - is a good example of a label that cuts its cloth according to realistic expectations of what an artist is likely to achieve. Low-selling artists are encouraged to hold on to their day jobs, but have their modest recording costs paid for; while a group such as Arctic Monkeys has a global marketing strategy mapped out for it.

Perhaps Guy Hands has something similarly flexible in mind for EMI. If so, he has a funny way of showing it. In his presentation, he said that “the most important thing we can do as an organisation and as an industry is to...get consumers to pay [for music].” The madness is that, more than any other band over the past decade, Radiohead built up trust with their fans by making music that meant a lot to people, music that fans were willing to purchase. That's why they were worth the millions that Mr Hands didn't give them.

It's not that all of his ideas are awful. Rather, it's the arrogance of their execution that seems set to trigger an exodus.

Pete Paphides is chief rock critic of The Times

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