These are strange days for the music business. Caught between the massive marketing potential that the internet affords and the immense and complicated piracy problem posed by the same medium, major record companies find themselves in a state of flux, caught between the traditional mediums, an ailing CD single market and a new generation of musicians and fans finding the internet an easy and direct way of finding each other.

The internet's potential for spreading the word on new artists and groups has been highlighted by the unprecedented success of Sheffield's Arctic Monkeys. A romantic myth had been built around the group's precocious rise, with the band's guerrilla online marketing campaign credited with building the foundations for their recent triumphs, including three NME awards, one Brit and a record breaking debut album which sold 360,000 copies in its first week.

It's certainly true that the band had a large internet following before they had even been signed, negating the need for the conventional comprehensive record company marketing campaign. Whether through accident or design, Arctic Monkeys have exploited viral marketing to a previously unparalleled extent. And yet it sounds so ridiculously simple; the band simply gave CDs away at gigs, and the songs were then shared freely via the internet by obliging fans.

The online fan-base that the band built up is fiercely loyal, and the fact that many of the songs on their debut album, Whatever You Say I Am, That's What I'm Not had already been given away for free evidently did little to stop their records flying out of the shops.

All of this is a stark wake-up call for an industry that has been dragging its heels for years. It's ironic that free file-sharing should help produce such a money-spinning act for an industry that has been so concerned with illegal downloads. The uncomfortable truth for the music business is that it's going to have to undergo a radical evolution if it is going to survive in any form that even remotely resembles its current status.

There is already some heart-warming evidence that the traditional industry's worst nightmare is taking a digital form; the internet is giving the power back to the musicians and the listeners, negating the need for the oversized middle man that the major record labels represent.

It's still unclear what route the music business will take in terms of the internet, yet for artists hoping to reach and build a fan-base with limited resources, the medium provides simple access to a gigantic, music-hungry audience. The rapid rise of Arctic Monkeys suggests that the internet offers an economic alternative to endless transit van tours of the toilet circuit for young bands and artists. While it's likely that the major labels will always swallow up the most popular online acts for the foreseeable future, smaller artists may one day be able to bypass the mainstream entirely.

If music can be sold, marketed and even performed directly there seems little function for the traditional industry at least as far as niche artists are concerned. Jason Anderson, an American songwriter who doesn't have a permanent address - he says his "life is a tour"- believes his particular brand of guerrilla touring would be virtually impossible without the internet.

"In terms of organising my shows, which happen all over the world and often at very short notice, the internet makes things so much easier. I can just e-mail someone, organise a show, and word will spread and I know there will be people there to enjoy it," he explains. "Without the internet, my options as a musician would certainly be more limited."

Anderson's label, the Olympia based K Records, has a strong online community of fans that often follow a number of the artists on the label's roster, behaviour that would be very unusual on the conventional majors, which are generally perceived as lacking in identity. This suggests a possible evolution for the industry - relatively small, niche labels that act as online meeting points for like minded musicians and fans.

Or perhaps the mainstream industry will heed the warning that has been so explicitly sounded by Arctic Monkeys, and finally acknowledge the positive side of free downloading and internet communities. Just as the Sheffield band swiftly rose from obscurity by securing a following that responded to free demo and live track downloads before the band even had a deal, other bands and artists are sure to follow in their droves. At present, record companies can afford to transform these examples of guerrilla marketing to their own advantage, but for how long? The internet is highlighting as never before the need for the industry to adapt or die.