Edgar Bronfman Jr, the music mogul heir to the Seagram whisky fortune, deals in trophy assets the way other people swap knick-knacks on eBay. Mies van der Rohe's Seagram building, Picassos, Rothkos, huge chunks of the family's business – Bronfman has traded them all. In the process of moving his family back from London, he is selling his $28m Manhattan townhouse, once owned by the Muppets' creator Jim Henson, and looking for another. It's the third piece of prime property he's sold in less than two years.

But it's another set of assets that Bronfman has on the market that is attracting the most attention – Warner Music, the home to Led Zeppelin, Bruno Mars and Plan B. Given the parlous state of the music industry in recent years, when Goldman Sachs was appointed to look at Warner's options back in January, the big question was would anyone care at all? Now a colourful set of contenders are cutting up rough as they line up bids for all or part of the firm.

There's Len Blavatnik, a Russian-born oil magnate turned media player; Ron Burkle, the politically connected supermarket mogul dubbed the "Billionaire Party Boy" by the New York Post; music rivals Sony, and maybe Universal; and a whole host of financial players. And hovering in the wings is the man who killed the music industry, Sean Parker, who co-founded Napster, the downloading service that kick-started the digital revolution, before first joining and then quitting Facebook. A casual observer might surmise that the music industry is hot again. A look at the numbers suggests otherwise.

Warner was Bronfman's comeback deal after his 2000 merger of Universal and Vivendi went disastrously wrong. Backed by Thomas H Lee Partners and others, Bronfman paid $2.5bn for Warner Music in 2003 when the music industry was already struggling. It's got a whole lot worse since. If Bronfman does decide to sell, he will only make a profit thanks to a successful IPO in 2005. He and his investors made their money back then; subsequently the shares, listing at $17, peaked at $30 in 2006, but are now worth less than $6.

Part of the problem is that nobody, not even Bronfman, really knows what is going on. Rumours and counter-rumours are circulating. No one talks on the record. Bronfman had wanted to sell his publishing assets and then bid for EMI, say some well-placed industry sources: a marriage between the two smallest of the sector's major companies has been on and off for the better part of a decade, and Bronfman sees a future where music firms make their money in "360" deals – owning rights to everything from merchandise to tour tickets and digital sales. He believes he could turn EMI's troubled recorded music division around. Scott Sperling, the co-president of Thomas H Lee, is said to have disagreed and pushed for the whole company to go on the block.

The sale has not been made any easier by EMI. Its disastrous takeover by Guy Hands's private equity firm Terra Firma ended in court and control by the deal's largest backer, Citigroup. The bank has begun tentatively talking to potential bidders about selling all or part of the business. EMI arguably has better publishing assets, Warner is stronger and certainly better run in recorded music. The two music firms could argue, and have argued, about who has the stronger assets. In the end it's like asking who do you like better, EMI's Beatles or Warner's Led Zeppelin? The end price is likely to be much the same for either firm.

There are probably so many permutations to this fugue that even Bach, let alone Bronfman, couldn't resolve them. Sadly the same holds true for the entire music industry. Both Warner and EMI have outstanding publishing assets, collecting royalties from a catalogue of the world's best-loved music. Music publishing is a steady, low-risk business that generates lots of cash – just the sort of thing private equity types love. But recorded music, the breaking of new acts and the selling of their work, remains a business in crisis. As Hands will tell you, it will take more than money to change that record.

Glenn Peoples, a senior editorial analyst at the music industry bible Billboard, says he has been surprised by the level of interest. "Publishing I understand, but recorded music? I wonder what the attraction is. The digital age has been great for consumers but it's been catastrophic for music companies, and the bottom isn't in sight. You are probably looking at another decade before anyone comes up with a solution."

In 2000, when the industry and the CD market were at their peak, the total number of music buyers in the US was close to 160 million. Over the course of the past decade that number has fallen to below 130 million. Worse still, the average US music consumer now spends $43 a year buying it, down from $60 in 2000.

Apple's iTunes solved one problem for the music industry, offering a legal alternative to Napster and other free download services. But it presented a new one. Instead of selling CDs at $12 a pop, the industry now sells singles at 99c. "We have moved from a dollars business to a pennies business, sometimes a fractions of a penny business," says one music executive. In this environment only the big survive, he argues. The same holds true for stars.

Lady Gaga can cut a deal to promote Polaroid, Justin Bieber can make 3D movies and shill for Proactiv spot cream, but the cash they make from recorded music will not rival the cash Madonna or Michael Jackson made from selling CDs. Lesser stars have little to prop them up, says Peoples. It's a sad song that is playing across the industry. Warner's revenues fell 13% between 2004 and 2010, EMI's fell an estimated 22%. Cushioned by a big company like Sony or Universal's Vivendi, the leading majors can wait it out, hoping digital dollars will emerge. EMI has already lost its independence. Warner may be the better-run company, but its prospects of keeping running for long don't look healthy.

However, developments over in California could offer a glimpse of salvation. Marissa Mayer, Google's hotshot vice-president of consumer products, is pushing the search firm to focus on music. She recently interviewed Lady Gaga, for example, for its Musicians@Google series. Google now sees music as a crucial battleground in its fight with Apple in an increasingly mobile world.

Its service is likely to provide an alternative to the iTunes model – offering subscriptions, making all of a consumer's music available anywhere on any device, and moving away from Apple's death by singles sales approach.

Google's entry will shake up a market Apple has so far defined, and coincides with a second wave of music services coming online from Spotify and others catering to a smart phone, iPad and tablet PC customer base that's expected to reach nearly 1.5 billion by 2015. Maybe, just maybe, there is a way the music industry could make some money out of all the music that will get played on those devices.

That future seems a long way off to Peoples, however. "At the moment all the music companies are leaky ships bailing water," he argues. Although they may be getting better at bailing, he adds, the leaks are far from plugged. Still, as bids for Warner start to take shape, Bronfman must be encouraged that someone is crying "land ahoy!"