Gabriel co-founded free music site We7 last year.
Peter Gabriel says record companies should reinvent themselves to be seen as a service industry and not as "owners" of music.
The former Genesis singer told the BBC he thought the current digital age paved the way for changes to be made.
The 59-year-old has been a pioneer in distributing music legally online.
He co-founded We7 - a website that allows users to stream and download music for free, with or without adverts - last year.
"I love all these experiments - there's a lot of ways for musicians to communicate and sell their records to their fans," Gabriel said.
"There's still room for record companies but they should reinvent themselves as a service industry and not as owners.
"The structure of the old album and waiting for that to be finished still has some merit but you can do a lot of other things and I think it should be a lot looser and mixed up."
Gabriel's comments come a week after rock band Nickelback became the latest group to sign a global recording, touring and merchandising deal with concert promoter Live Nation, over a traditional record deal.
Artists including Madonna, Jay-Z, U2 and Shakira have also all signed to the company in the past year.
We7 is not Peter Gabriel's first foray into digital music.
In 1999, he set up OD2, a music download service selling individual tracks.
He built it up to a database of approximately 350,000 tracks before selling it on to US digital music distributor Loudeye in 2004.