Ever since the first iPod offered a mighty '1,000 songs in your pocket' back in 2001, the hand-wringing over the irrelevance or impending demise of album artwork has been going on.

But with the potential loss of HMV, the last mainstream provider of physical records in the UK, from the high street, and has the death knell finally sounded for the physical product, and what does all this mean for album artwork? While we're all busy absorbing music on the go through our phones, has the special connection between music and artwork disappeared at last?

Stuart Fowkes talked to record labels, bands, designers and record shops to get some answers.

First up, the good news: 2012 was a great year for vinyl, with 15% more shiny black discs sold than in 2011. What's more, CDs and vinyl together still make up the majority of the music sales market. The bad news is that for all the much-vaunted resurgence in vinyl purchases, that still only comes to 389,000 copies sold in 2012, and sales of physical albums is dropping hugely every year - 19.5% last year alone. Digital will very soon be the biggest slice of the pie, and that's just in terms of legal download purchases. If you take into account illegal downloading and the 3.7 billion tracks streamed last year just in the UK, then things don't look so good for physical albums and, by extension, the concept of album artwork as we've always known it.

When you straw poll artists, their attitude towards physical product tends to be far more pessimistic than their label counterparts, perhaps because they're more caught up in mystique and image of album artwork than by straightforward business concerns. Slint legend David Pajo, for instance, thinks "the artwork isn't as important anymore. With LPs, you could really make a record mysterious and detailed. Squashing things into JPGs for iPods loses all of that: artwork has to be dumbed down and reduced to simple graphics. A lot of people only listen to MP3s on their iPods without any artwork. It used to be that the artwork would shape (and often enhance) your impression of the music. When I think of specific albums, I visualise the album artwork, but not so much with current music. I like the convenience of MP3 players and I don't want to seem negative towards them, but vinyl is truly the ideal format to enjoy your favourite music."

It helps that vinyl is not just the hipster format of choice at the moment, but a shorthand signifier for a cultural sensibility so pervasive it's even found its way into hideous dating website ads. Constellation Records co-founder Ian Ilavsky has a passing concern that there could be "any number of people buying the vinyl now because it's the cool thing to do and may never even unwrap it, or they're buying it as a testament to their fandom and putting it on the shelf without listening to it."

While vinyl still has plenty of fans, digital is, of course, what's killing off the maligned CD. Generally speaking the bigger the artist, the more sales are digital (and the more digital file-sharing of that artist take place) and the less likely it is that their records will be clogging up your house. This experience is borne out by indie label Temporary Residence (home to Explosion in the Sky, Pinback etc.), for whom digital only accounts for 20-25% of their sales.  

Label owner Jeremy deVine, who also handles its art direction, says that "because album sales overall have declined – and digital sales have bitten a significant chunk out of physical sale – we manufacture fewer copies, so the per-unit cost is higher, and profit margins are lower. The only ways to combat compounding shrinking sales with shrinking profit margins are cheaper packaging or more cost to the consumer. There are valid arguments for both, but I tend towards the notion that making fewer copies of something very special is more meaningful, even if it means we have to charge a little more for it."

This is particularly true if you're looking at some of the recent deluxe reissues and new releases in recent years - whether you're a fan of experimental drones or bald egomaniacs, there's a vinyl release out there to make you draw in your breath and check your bank balance.

Not only that, but as well as grandiose box sets there's an increasingly fragmented array of formats on which you can get hold of a new release, from straightforward digital and CD to a ridiculous number of niche formats. Does this mean that designers have to work twice as hard to make an album sleeve work at 12"x12" as well as a tiny JPG?

From a design perspective, the fragmentation of formats actually leads to a greater world of possibilities. Paul A Taylor, in-house designer for Mute, believes "it was actually a lot easier when it was a 12" vinyl sleeve and a poster. Now you have so many different avenues that need to work in so many different ways.Generally, there is a bigger world to create and range of formats - having a deluxe package, vinyl, digital and CD - all of which need a different design sensibility."

"The visual world that is created for an artist is more interesting now, or potentially more interesting. Yes, the 'sleeve' is seen in the main as a small JPG on a phone or MP3 player, but that's like the 'placeholder', if you like. As much as drawing a listener in with music, you still need to draw them into the world visually for it to have an impact. The 'placeholder', the sleeve, the web presence, the videos, the photos, the marketing - it's all part of the visual world that needs to be created."

Carl Smithson, owner of Oxford record shop Truck Store, agrees: "What's interesting to me is how online advertising can add further dimensions to an album cover. You often see banner adverts on websites which take an element of the album cover as their basis. These days artwork is designed to work on multiple formats with clever designers able to create an instantly iconic image. Think how simple but powerful The XX artwork is: just as effective as a CD or 12", but carrying the same power when used as a backdrop at a live show or as a pop-up banner on a website. With this in mind I'd say there are probably fewer albums coming out with a sprawling landscape on the cover like an old Yes album. Instead you see a more simplified design with the potential to become iconic."

This sense of a 'visual world' that begins with album artwork, but helps define everything an artists is about, recurs. Ninja Tune's Kevin Foakes (AKA DJ Food's Strictly Kev) asks "what would the Gorillaz be without Jamie Hewlett's artwork and videos? Labels like Ghost Box or Finders Keepers without their visual plundering of the past, similar to the records they release? At best, I think the listener feels that they're buying into a new chapter in a story when they get a new record. With people like Beck, Bjork and Bowie for instance, you start to see a changes as they grow and progress through their career, they respond to the times visually as well as musically, that's something the fan can relate to and is as much part of any release as the music, even the anti-design of The White Album."

Though it feels like all the information you could ever want about an artist is just a quick Google away, it's surprising what effect an artist's self-cultivated visual world, and the 'official' channels through which they choose to communicate with the world can have. As Ian Ilavsky has it, before the internet "the record, the object carried everything, all the context for the band and the music. We try to champion that idea through the label. If you take Godspeed, who do very few interviews, very little media, they're not shaping the context for what they do other than in how they release their records. In this way, an album cover is important far more than even the cover of a book, which only goes some way towards telling you what the author's underlying aesthetic is, or what genre you might be about to read."

And for all its convenience, speed and cheapness, this isn't something the digital medium has successfully nailed just yet. Rough Trade director Stephen Godfroy says that artwork "provides a crucial visual dimension and adds reference and meaning to the limitations of audio. Digital-only retailers are desperate to replicate this particular value of the artefact, but so far all efforts have failed."

Despite this, it's only a matter of time before digital is far and away the dominant force in music retail. So if the death knell has finally sounded for the CD, how are labels innovating or changing what they do in 2013 to keep people buying? Some focus on vinyl production, others on special editions, mining their own back catalogue with expensive reissues to appeal both to the older, more product-driven record buyer and bring in some new listeners, all at a nice high margin.

On top of that is the desire for increasingly-unusual 'special items' to be part of standard packaging, as explained by Strictly Kev: "Less people are buying, that's just a fact. Thus the print runs are lower and the costs higher in relation which pushes the prices up - this ultimately ends in a Catch 22 situation where people are forced to really choose the things they buy and can't afford to 'take a chance' on something as much as they used to.

"A special pressing (picture disc, coloured vinyl, flexidisc) or packaging (poster covers, die cuts, screenprinted sleeves) will be more appealing to buyers and the label has always recognised that. Most artists I know want to have what we call 'specials' included in the artwork. This used to be a spot varnish or heavy card stock, but these days is more likely to be a 5" vinyl disc or a mini DIY turntable."

According to Stephen Godfroy, lavish packaging is by no means limited to big-name, established bands with reissues to flog - it's often a gambit to establish the personality and brand of a new artist: "Independent labels and major labels alike are all too aware of the value of music the artefact. Some invest with great packaging with new artists to convey their identity, some invest in lavish reissues wherever they perceive the risk of added costs can be best offset with a demand. Clearly, added cost requires a higher price, so labels need to feel sufficiently confident of being able to see a viable return (sales and/or establishing an identity for a artist/release) on spending that extra."

Given the alarming rate of decline of CDs, are relatively-small vinyl sales (and let's not forget the minor resurgences of tapes) enough to save physical product from disappearing entirely at some point in the future?

Paul Taylor thinks that "the physical product will disappear. Not for a few years yet, but it will. I strongly believe that there is a future for visually creative ideas and worlds to be created to sit alongside music in a digital age, though. That's part of the excitement and creation of the mood for an album and an artist and I don't see that changing fundamentally."

More optimistically, Strictly Kev reckons that "Record Store Day has given physical sales a massive injection and I wouldn't be surprised if CDs come back into vogue within the next ten years as a fetish item."

"I think digital is really the next frontier. It's hardly been scratched yet, but the next big jump with be the digital 'box set' with deluxe interactive art, liner notes, remixable elements, videos etc.: what will become known as 'immersive albums' where you can play with the content as well as just playing it. I'm looking forward to the next generation of digital artwork for mp3s, something that will work on an iPad, sleeves that are moveable, remixable - the digital equivalent of Beck's The Information, where you could customise your own version of the artwork."

Remixable artwork, continued strength in vinyl sales, the CD as a fetish item and more innovation in special packaging, whether it's Gunning For Tamar's wristwatch or Matmos' sensory-depriving glasses: there still seems to be plenty of mileage in packaging.

But the last word goes to Ian from Constellation, who thinks that maybe physical albums don't have to be for everyone: "There are lots of 'indie artists' whose music exists almost as a way to brand themselves on YouTube or through other avenues. Lots of music is disposable, singles-driven and all about engaging through video and image. These people should just be making their money from YouTube or other ways of monetising their music. More power to them for not using up valuable physical resources: Please stay on the internet and make the internet your entire cultural sphere. Do us all a favour and don't clutter up the physical album marketplace with your stuff."