When I started Cherry Red Records back in 1978 it was the beginning of an extraordinary time. In the UK, the music business was being turned on its head by an avalanche of independent record labels, all releasing music that sounded very different to that being marketed by the big music companies. There was a revolution afoot that was challenging the establishment - and it was being passionately driven by music business novices.

Any decent independent record release sold several thousand copies and pretty quickly recouped its costs. Vinyl was king and the packaging was almost as important as the music. Music was popular, people went to their local record shop, and paid for it.

So, 35 years later what's changed?

Well, music is actually more popular than ever. It is hard to go anywhere without hearing it being played somewhere. People are more aware of what is happening musically and, as in 1978, independent labels had an amazing year in 2012.

Against that, the number of record shops has fallen drastically, and online services (both legal and illegal) continue to chip away at their market. Last month, HMV, the UK's last remaining music retail chain, saw it's shares drop 40% over warnings that it is likely to breach its banking agreements. Despite there being many fantastic independent record shops in this country, picking up a CD on as shopping spree is getting harder and harder.

The latest BPI figures show a large percentage drop in album sales, and on the face of it the outlook looks pretty gloomy. But, is that the full picture? In the UK, the physical format has been surprisingly resilient. The week before Christmas, 82% of all album sales were physical. The figure for the year was over 70%.

On the one hand, people are not paying for recorded music in the way that they used to; on the other, a large proportion of those who do, still prefer something tangible they can hold in their hand.

Cherry Red released over 500 albums last year. Okay, the majority of them were catalogue, but people bought them. Virtually every release at least broke even. No doom and gloom for us then.

So then, why do music fans still love physical formats?

There are several reasons:

1. Packaging. When independent music really broke through in the late 1970s, how a record was presented was of paramount importance. The packaging expressed the music. This ideal lives on, and we still put a lot of thought into presentation and the information provided inside the package. Downloads are convenient, but they have removed the context that music fans love.

2. Sound quality. This is still important to many music buyers. The quality is much better on a physical release.

3. The album. Despite the popularity of playlists or cherrypicking tracks online, many of us still cherish the album as an art form in its own right.

4. Brilliant independent record shops. There may be fewer of them, but this country still has some of the best in the world. And the people working in them know and love their music.

5. Mail order. An upside to the internet is that a label likes ours now has a global shop window. We can sell an album by Go Kart Mozart or The Fall direct to a music fan anywhere in the world.

So, the world of music buying is still mainly physical. The cloud has not won the battle (yet).

And as an industry, therein lies our challenge: embracing the opportunities of digital while, at the same time, being smart enough to meet demand for formats that the majority of music buyers still want.

Follow Iain McNay on Twitter: www.twitter.com/CherryRedGroup