Guy Hands has been busy since taking over EMI in September. His Terra Firma private equity group has made money on 24 of his 25 deals – the exception was Meridien hotels – but the task of rescuing EMI is easily his toughest yet.

Mr Hands has installed himself as the boss for now but it is not easy, however smart or charming you are: the word is he offered Radiohead £3 million for In Rainbows (a one album deal on which he would still have lost money) but the band opted to head off to the internet instead.

Still, it is early days and Radiohead can be miserable at times. What is certainly true is that there are a lot of overheads at EMI that can be tackled, such as the spending on fresh fruit and cut flowers in every meeting room at the company’s West London headquarters. Until recently, it used to run up a £20,000-a-month bill on candles at a Los Angeles apartment used to entertain artists.

Contract management seems to have been poor, although probably every record company has its fair share of multimillion advances being salted (to put it politely) away.

The result, according to estimates floating around the City, is that £107 million of fixed costs and £28 million of marketing costs could be stripped out. These alone would practically double company cashflows, which in the annus horribilis of 2007 amounted to £167 million.

But can they be achieved? They have to be: Terra Firma’s interest bill is estimated at around £175 million a year, so the cost-cutting must deliver but without denting the marketing and A&R spend, without which artists will desert. After all, it is easy to believe stories about the excesses of music industry management – and yes, there were plenty – but it is also easy to exaggerate how bad things were.

The first challenge for Mr Hands and his team is creative leadership. If venture capitalists start trying their hands at A&R, they will lose their money; Terra Firma must be careful not to get too involved, which is why some have worried when Mr Hands was trying to schmooze Radiohead’s management.

Music, like any other media business, is about relationships and when artists are sometimes committing their career to a company, the relationships are very important indeed.

Mr Hands is smart enough to know the importance of empowering label bosses but he has to get on and do it. When he owned pubs, he stripped out the central financial management team of 1,000 people and landlords ran their own budgets. Costs fell and sales grew.

Yet music is more complicated than running a boozer (despite some superficial similarities). Talk that the Virgin label might be revived in the US, as an example of empowerment for middle management, has yet to be matched by action.

At the moment, the problem is that senior executives have yet to be confirmed in their positions (indeed the odds are they will leave) and so key managers below them are nervous as to whether they will survive. The lower ranks say that decision-making is paralysed and will remain so until it is clear who is in charge long term; every major music merger in recent times has been accompanied by a massive market share fall (think Sony BMG’s problems three years ago).

The situation is critical: EMI’s once mighty share of the UK business has tanked – running at single digits apart from compilation albums through most of the year – and while Kylie is selling reasonably well, the Spice Girls looks less likely to deliver if the sales buzz is true.

The second problem is that nobody has a clue how to revive the recorded music market, other than wait for digital to grow faster than the sales of CDs decline.

The market by units is down about 10 per cent in the US, although by value it is a more modest 7 per cent, according to Warner Music, and after a wave of iPod buying over Christmas, next year is likely to be horrendous again. Yet some numbers seen around the City suggest that Mr Hands and his team want to lift recorded music profitability from £61 million last year to £528 million in 2012 – no mean feat.

If there is one place to start, it is at the top. Terra Firma needs to find a chief executive soon, who can start to rebuild. Otherwise, there is a risk that EMI will gradually fall to bits.

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