More than half of young people copy the songs on their hard drives to friends and even more swap CD copies, according to research that reveals the huge challenge home copying poses to a music industry already battling internet file-sharing.

Three decades after cassette decks first allowed people to make free music tapes for friends, a study by the industry group British Music Rights suggests home copying remains just as ingrained in UK culture.

BMR's chief executive, the singer Feargal Sharkey, said the research underlines the urgent need to adapt to consumers' attitudes or face serious repercussions for the next generation of musicians.

The industry's anti-piracy efforts have largely focused on illegal online music swapping - with estimates suggesting only one in 20 digital downloads is paid for. But the online problem is potentially dwarfed by "offline copying", argues BMR. Its research, carried out by the University of Hertfordshire, suggests that, for 18-24-year-olds, home copying remains more popular than file sharing. Two-thirds of people it surveyed copy five CDs a month from friends.

Overall, 95% of the 1,158 people surveyed had engaged in some form of copying, including taking the music contents of a friend's hard drive - 58% - and the more old-fashioned method of recording from the radio.

BMR, which lobbies on behalf of composers, songwriters and music publishers, claims its research is the first academic study of its kind, and fills a hole in the industry's understanding of how people consume music.

Former Undertones frontman Sharkey said the aim was not to lambast young music consumers but to create business models that fit their behaviour and tap into the unrelenting demand for music. He hopes the findings will provide impetus for change.

"For somebody who has spent 30 years in the music industry, you instinctively know this stuff is going on. But when you actually sit looking at your computer and see a number that says 95% of people are copying music at home, you suddenly go, 'Bloody hell'," he said.

Many record label executives see the piracy problem getting worse before it gets better. The BMR research echoes other studies signalling that knowing something is illegal is no longer a deterrent. Well over half its respondents who know that copying music from a CD to a recordable disc is illegal do so anyway.

But Sharkey believes a combination of education projects and new ways of providing music to consumers - for example, advertising-funded downloads - will change that.

"Ultimately it has to get better ... At some point musicians and songwriters have to make enough money out of it otherwise they stop doing it," he said.

"My concern is for the next generation of sexually frustrated, hormone-ridden 17-year-olds that are sitting in a bedroom about to possibly, and I hope, write something like Teenage Kicks," he said, referring to the Undertones song the late DJ John Peel made his anthem.

The aspect of home copying that most worries BMR is the speed with which friends can now swap music, whether from one hard drive to another or on to MP3 players. Almost half the music in the average MP3 player collection comprises tracks that have not been paid for, the report says. People aged 18-24 keep around £750-worth of unpaid-for music on their MP3 players.

The study was carried out against the backdrop of government deliberations over how to introduce an exception in law so that people can legally copy music they have bought for private use.

Currently, UK consumers are technically breaking the Copyright, Designs and Patents Act 1988 by copying tracks from CDs to their PC or digital player, or making an extra copy to play in the car.

The Intellectual Property Office concludes consultations on changing the law tomorrow and BMR is submitting some of its research.

The music industry says it accepts consumers should not be punished for shifting music from one format to another, but some are concerned an exception will increase the perception music can be freely copied with impunity.

BMR has "no problem in principle" with the concept of changing the law. But Sharkey is urging the government to look to European law, which dictates that where a private copying-style exception is created there is also some sort of compensation for the creators and performers.

Whatever the outcome, the prevalence of offline and online music copying shows the music industry has "a lot of big challenges it needs to face up to very quickly", said Sharkey.