Steve Purdham, the co-founder and chief executive of online jukebox We7, can recall those heady Saturday nights as a DJ in the pubs and clubs of northern England. The Durham-born 20-something saw disco fever rise and fall and hung up his headphones on the arrival of Soft Cell and The Human League.

Now Purdham has swapped his doubledecks for the internet. The online music player he founded in 2007 with the former Genesis frontman Peter Gabriel is taking off – and he thinks it is the future of radio.

"Music is so powerful that just taking an individual song does chemically change people," he says. "That's what DJing showed me: if you listen to the emotion of the audience, you can change their state. What I do now is let people listen to music in a way that can affect their lives."

Since its launch five years ago, We7 has been on the crest of the wave of changes in music and on-demand listening. We7 has evolved from an ambitious music downloads site to a streaming service similar to Spotify, before last year transforming into an online jukebox.

We7 has survived the downfalls of internet pioneers including MySpace and Napster – and contributed to a surge in digital income for the music industry. Last year total digital income accounted for 35% – or £282m – of the total UK music market, up from 14% (£128m) in 2008, according to the trade body, the BPI.

But Purdham says it was not until 2010 that he saw the potential for a viable business model in digital music – three years after he had convinced Gabriel (pictured below in 1973 when he was in Genesis) to back his vision for an online jukebox. "The exciting thing was that it could not work," he says. "It looked impossible. But you just knew that the internet was going to disrupt the music world. The way the music industry has grown has made an industry which is not accepting new technology. And that's one of the reasons why it got itself into trouble."

The son of a grocer and a shop assistant, Purdham was the first of six sons not to go to work down the Durham mines. Instead, he studied computer science at Middlesbrough Polytechnic – now Teesside University – and quickly became a technology zealot. He rattled through a number of software firms in the 80s and 90s before founding an internet security firm at the height of the dotcom boom (which he later sold for $415m).

The one-time disc jockey has a reputation for straight-talking – he describes music industry executives as "some sharks, some nice people" – but is not chippy. "I have more in common with people who listen to music than people in the music industry," he says, although his relationship with Gabriel is yet to show any signs of strain.

The singer-turned-investor first met Purdham over a cup of tea in the kitchen of his recording studio in Box, Wiltshire. The pair grappled over what they would call their newborn music player, with suggestions ranging from the random – "Jellybean" – to the ridiculous: "Thunderspark". Eventually they settled on We7, a domain name that cost them €340 from a man in China. Gabriel remains involved in We7 and, although he does not call as often as Purdham might like, he will sometimes turn up unannounced at board meetings and has no shortage of enthusiasm for the project. "He could have just put in the money and buggered off to record an album," says Purdham. "But he didn't. I could be in McDonald's getting my tea in Macclesfield at night and I'll get a phone call from him with an idea."

In conversation, Purdham veers from the pragmatic to the preposterous. He concedes that making money from digital music is "like climbing Everest", before proposing that a whole new industry will soon be built around 3D printing. "People talk about piracy – they haven't even begun to scratch what piracy is going to be like in the future," he says, perched on the rust-coloured sofa in his north London office. "You design a glass jar or a sculpture, and anybody will be able to print that in their own home. You will be able to print guns. You can already print body parts on a 3D printer. All of these things that Star Trek had are starting to come true."

Purdham has no time for negative thinking. The motto instilled in him from his earliest years – "I can, I will, I must" – is clear when he talks about the impact of technology on established industries. He compares those warning about the pitfalls of change to critics of pirate radio in the 1960s. Those who warn about privacy are similar to those who thought the TV was the "evil eye in the corner".

"People focus on the negative therefore the negative happens," he says, predicting that traditional radio will go the way of bricks-and-mortar music retailers if it fails to adapt to a change in listeners' habits. "Spotify is really the future of retail. It's the replacement of shops like HMV. We're the future of radio," he says.

Social networking giants, such as Facebook and Twitter, are steadily turning all forms of media into a participatory activity – and Purdham is not worried about an internet that knows more and more about its users each day. Spotify suffered a privacy backlash in September last year after it introduced a new feature that automatically shared on Facebook each song listened to by a user. Purdham says We7 will introduce a similar feature shortly, and that the internet will soon "know what you want before you know what you want".

"A lot of people got caught up about the privacy situation with the stuff that Facebook is doing," he says. "Some people will say it's creepy; some people will say it's magic. What's the difference?

"A lot of people look at the mechanism [for sharing online] and get worried … I'm not sure what is right or wrong, but the power of the internet is that it records what goes on. There are some fears, but that's life. Technology challenges people and that's what I love about it."

Purdham says his Milton Keynes-based firm is on its way to making money. We7 tripled its annual turnover in 2010, according to the most recent filings at Companies House, and reduced losses to just under £3m. The company secured £3.6m in funding in May last year from investors including Qualcomm Ventures and Pentech Ventures, with a further £2.1m to be paid in the final quarter of this year. It also won a government grant worth £1.8m for last year and 2012.

More significantly, for every hour of music played on We7 last year, the company generated more advertising revenue than it cost to stream the songs.

"That's the holy grail that we've been trying to get to. That means the business can become viable. Now we know we can make it work, it is about scale," he says.

"Nobody has yet made a business [of this type] that will generate cash. But I don't think we're far away from that. Eventually somebody did climb Everest. Eventually somebody did run the four-minute mile. Eventually somebody will start making money out of digital music."