It's New Zealand music month. But the sparkling dollar- sign necklace around composer Princess Chelsea's neck is a joke. "I'm obviously not rolling in dough," she says.

Like most New Zealand musicians, Princess Chelsea (real name Chelsea Nikkel) says she isn't in the music game for the big bucks. The 25-year-old composer and "bedroom recording artist" has been playing in bands for seven years - first in punk act Teenwolf, then on the glockenspiel and keys as part of The Brunettes.

Nikkel lives in "the ghetto" - a rundown brick villa in Kingsland that for the past 15 years has been home for a procession of musicians attracted by cheap rent and a sense of supportive creative community. The garage out the back has been rehearsal space for The Brunettes, Ruby Suns and the Cosbys.

One of the rooms, with its faded carpet, pink walls and patched ceiling, is being fitted with a green screen, transforming it into a makeshift studio where musicians can knock up a music video on the cheap.

Nikkel recorded her recent debut album, Lil Golden Book, at home on equipment that she bought and had a friend mix it for free. It's very DIY... out of necessity.

Nikkel's eerie sweet synth-pop tunes may have won rave reviews from America's Rolling Stone ("absolutely sublime"), but her kind of music would never wind up on commercial airwaves-and that ruled it out for government funding. "I've applied every round for the last two years, but unfortunately I haven't had any luck," says Nikkel.

Until now, getting New Zealand music on mainstream radio is all the Government's broadcasting funding body NZ on Air has cared about. For the past decade they have funded up to 30 albums a year, dishing out as much as $50,000 per project with the proviso that the budget would be matched by the artist's record company.

Winners under the scheme were Opshop, The Feelers, Scribe, Brooke Fraser and funniily enough, Garageland.

Opponents of the system (and the critics have been vitriolic) say it encouraged musicians to emulate overseas acts, dulling down originality and promoting blandness rather than fostering local creativity.

This week, slap bang in the middle of New Zealand music month, NZ on Air announced changes to its music scheme. Making Tracks, which comes into effect on July 1, scraps funding for albums altogether and will put $2m into funding 200 singles and music videos instead. Artists can apply for grants of $10,000 per song-up to $4000 to record the song and $6000 for a music video.

The pool of money available is about the same as before, with the exception of the first year, in which an extra $500,000 is provided to kick-start the programme by buying an additional 50 projects.

In the past, commercial broadcasters had the power to decide which artists received funding. The new system will spread the cash to a broader range of artists. About 60 per cent of the grants will be given out to bands likely to get airplay on commercial radio and 40 per cent will be aimed at bands that are played on alternative stations and online.

The selection panel of six to eight people will be made up of three broadcasters, who represent the mainstream commercial radio stations, as well as alternative radio stations like bFM and music television. The remaining selectors will be independent music experts, with at least one member from outside Auckland.

When NZ on Air started its push to get local music broadcast in 1991, local music content on air was a measly two per cent. Now that figure has grown to around 20 per cent. NZ on Air's music manager, Brendan Smyth, says it is time to diversify - implying creativity has previously taken a hit for commercial imperatives.

"If the first 20 years were characterised by a mainstreaming strategic objective, from the first of July it will be characterised by diversity. That's not just in terms of the music we will fund, but in terms of the platforms we will fund for," says Smyth. Making Tracks stands to benefit artists like Nikkel, who is broadcast on bFM but would never make The Edge's playlist.

Music producers fear the cut to album funding will hit them hard and lead to a deterioration of music recording quality, sending the industry back to early 1990s production values that are unable to cut it with slick hits coming out of the US and UK.

That may be construed as sour grapes by those who are set to lose financially - but feedback on Nikkel's YouTube clip reveals how lo-fi output can be perceived by audiences.

One viewer remarks that the quirky homemade clip, "shows how cheap nz singers are" (sic).

Another viewer hits back: "These dickheads that comment negatively obviously do not appreciate your talent and originality. The[y] probly listen to mainstream crap ie lady gaga and katy perry shit" (sic).

The so-called "mainstream crap" is exactly what New Zealand artists are competing against. It's a crowded market with plummeting record sales and falling revenues, as local musicians are heard alongside international stars such as Lady Gaga and Katy Perry who have huge resources behind them. Simon Holloway's job is to get New Zealand artists' recordings up to international standard.

He setup Beaver Studios in 1991and a string of the country's top musicians have recorded there, including Che Fu, Brooke Fraser and Nesian Mystik.

Last year, Jonathan Campbell used Beaver Studios to produce Dane Rumble's hit song Cruel, which was named the Most Performed Work in New Zealand (most played on radio and television) at the 2010 APRA Silver Scroll Awards.

In NZ on Air terms, that's an enormous success. And yet Holloway has had to mothball two of his three studios in the past year. He says with the changes to NZ on Air funding he will be forced to close down his central Auckland premises. He hopes to set up a studio at home and continue working, but it's hard graft for miniscule returns.

And Campbell's hourly rate for producing Rumble's album worked out at $6.40 - less than half the minimum wage.

Holloway predicts the $4000 awarded to musicians will not trickle down to the studios. Artists will record at home on their own equipment then maybe bring the digital file in for mixing and mastering - expecting a top quality professional result.

By contrast, landing an album contract in the studio would give Holloway a solid block of work, profile and a calling card to leverage the rest of his work off. "The word is atomised. That's what's happening," says Holloway. "Everyone just scuttles off to their bedrooms with their computer and it's making a cottage industry. There is no centralised, meaningful, positive hub of this engine of the music industry. The engine's broken down and fallen to pieces."

Even if an artist's full $4000 did go to studio recording costs, Holloway says it will not be enough. He budgets a properly- produced pop track at $15,000 to $20,000.

Campbell, meanwhile, is packing it in and heading to Canada. He had seen the writing on the wall from NZ on Air, and says many of his producing colleagues are also being forced out. "I would say most of them are either going to pack it in and move on to another job or move overseas."

Producer Evan Short has an impressive music career behind him, a glittering client list - and one week's wages in the bank.

At 33, Short has already racked up 19 years in the music business both as a musician and engineer. As one half of drum-and-bass duo Concord Dawn he has had commercial and critical success.

He left Concord Dawn three years ago to concentrate on his first love, music engineering, and has worked with David Dallas, P-Money, TikiTaane, Shapeshifter and just finished Shihad's Jon Toogood's new side project, The Adults.

Short also laments the lack of money in the industry, leading to a squeeze on high quality music production. "There's more bands in NZ than ever and probably more physical output than ever but fewer and fewer studios. It's slowly grinding our part of the industry out of the chain."

Back at NZ on Air, Smyth denies the changes will see a return to garage days and says Making Tracks will actually increase the amount of money available for studio production. Previously some of the album funding had to be spent on promotion and marketing. Theoretically, the funds available for recording costs are increasing from $850,000 to $1 million.

One aspect of the music industry that has always been criticised for being woefully underfunded is video production. The $5000 grant available for music videos had been unchanged since 1991. Making Tracks bumps that up to $6000 on the condition that the artist contributes another $2000 of their own money.

In the age of YouTube, music videos are now seen as a vital component of getting the song out to the world.

Former New York-based director Ivan Slavov has produced more than 150 music videos in New Zealand for artists such as Opshop, Vince Harder and J. Williams.

He says $5000 for a video was "unrealistic", and any increase to the budget is great news. He sees the lean budgets and DIY approach as part of a revolution in the music industry. Slavov is happy to see the profit-hogging record companies crumbling. "For the first time in my life, music has gone back to the artist which is where you want it to be." The extra will be a help, says Slavov, but will not make him rich. "I'm a starving person like most musicians."

• NZ on Air's funding of album recordings, radio singles by new artists, and music videos will be merged into one scheme on July 1.

• Making Tracks will fund at least 200 projects a year - 200 singles and 200 music videos.

• Artists can apply for up to $10,000 per song: $4000 to record the work and $6000 to make a music video.

• Artists can receive up to three grants each year.

• Artists must prove they are motivated and have developed a following.

• About 60 per cent of the grants will be aimed at commercial radio, and 40 per cent for alternative and online platforms.