Just over 20 years ago Klaus Heymann, a German-born entrepreneur resident in Hong Kong, did a favour for a business friend in Korea, an arrangement which went pear-shaped and landed Heymann with a product that he hadn't particularly wanted.

For his Korean colleague, Heymann, who already had considerable experience in the music and audio business, secured the rights to the masters of some 30 digital recordings, which were intended to be manufactured for door-to-door sales in Korea, a big business in that country. Too late in the deal, the friend realised that he didn't have the manufacturing capacity or the money upfront to finance the project.

Heymann, who had started a record label called Marco Polo, decided to use the digital masters to launch another business in the then-young CD market, and do something unprecedented - undercut every other company in the blatantly overpriced recording industry and create a budget label where expensive CDs would be sold at the price of an LP record: £4.99.

He fought to establish that price. His own salesmen in Hong Kong argued vociferously against it. It couldn't compete with the big boys, and it wouldn't make money. Heymann stuck to his guns, telling them: "Let's be really aggressive about this." He won and the day after he released the first five issues, in his own words, "the telephone started ringing from all over the world. It was the first budget label in CD history, and I knew I was on to something good.

"And that", he reflected on a visit to the UK last week to begin marking the 20th anniversary celebrations of his company, "was the true origin of Naxos."

It's one of the most famous stories in the history of recording. When Naxos was launched in 1987, the majors - Decca, EMI, Deutsche Grammophon and the rest - sneered. The orchestras used were little-known east European bands, the repertoire debatable and the quality of recordings regarded by many as a joke. In the early years, some big-name music critics wouldn't even have a Naxos disc on their shelves. For many, it wasn't just cheap in its pricing strategy, it was cheap in every department of quality.

It was modest in its dimensions. The first Naxos catalogue, published in 1988, contained just 61 titles, mainly featuring artists and orchestras from Slovakia and Hungary.

And what has changed since then? Absolutely everything. Heymann again stuck to his guns, the catalogue grew, the quality grew, the word spread, demand globally began almost visibly to increase. Suddenly, as the majors in the record business began to run into trouble through their own outrageous overpricing and global recession, ditching their house artists and orchestras en route, Naxos developed muscle, style, confidence and an awesome competitive edge.

Artists flocked, wanting to be associated with a company that was genuinely interested in expanding the repertoire. Where Naxos once had to dig out lesser east European orchestras, hungry for work and dollars, big name outfits, including the London Philharmonic, Philharmonia, Bournemouth Symphony and RSNO, with big-name conductors, including Leonard Slatkin, Marin Alsop and Stephane Deneve are now stable artists in the Naxos team.

The statistics speak for themselves. At the start, Heymann had 25 people working for him in the record business. Now he employs 300 worldwide in the Naxos empire. His turnover last year was $70-80m. The catalogue now contains more than 3000 items, and there are 20 new releases every month. Sales are in excess of 100m. The company is a market leader. It has swept the board and sidelined the competition. It is one of the dominant and most respected record companies in the world. The label, its artists, orchestras and recordings are multiple award winners.

In the breadth, depth, ambition and prestige of its repertoire, Naxos has no serious rival anywhere in the world today, even among specialist labels. Its ongoing series, including a breathtaking American Classics Series, a Rossini opera series and, uniquely, the specially commissioned series of 10 Naxos String Quartets by Sir Peter Maxwell Davies, have given the company a powerhouse force in the market that wipes the floor with the opposition.

But this is only the tip of the Naxos pyramid. CD sales don't make serious money, even since he put the price up from £4.99 to £5.99.

"Orchestral recordings rarely recoup the investment; opera recordings never do. We didn't make any profit at all from CD sales until about 2000."

Heymann's sharpest move in growing the company was to diversify early. People kept making suggestions: "Always whispering an idea in my ear." His response was always the same: "Make me a proposal." Naxos Audio Books, which took eight years to reach profitability, is now a huge earner, not least because the Heymann approach is to maximise every asset at his disposal, so he can have big-name house artists such as percussionist Evelyn Glennie appearing as narrator in an audio book.

He produced best-sellers in a parallel field with what he calls "mixed-media products", books with CDs, from the Lives of the Great Composers, to A-Zs of opera, of pianists, violinists, etc, education books and more specialist surveys, including the impressive Wagner and American music books out next month.

Above all, Heymann was very fast on to the internet, to the extent, he says, that Naxos is now a music-based media company. "We have a lot of revenue from downloads, streaming and licensing. Increasingly, we hire people in the IT sector."

Naxos employs 55 systems analysts, web designers and programmers in its IT department. Digital delivery formats are the absolute priority. The Naxos Music Library, marketed to schools and colleges, offers access to 220,000 tracks from 15 labels. Naxos Radio offers 75 web-based channels of streamed classical music through a computer.

Heymann's momentum, driven as much by his insatiable passion for classical music as by any business aspiration, is unstoppable. He's planning at the moment to have a range of pre-loaded MP3 players out on the market this year, available in non-music outlets "from gas stations to pharmacies", each of which will carry 50 hours of music and be available at about £50. "It might work, it might not. We'll try it and see."

It's a far cry from the original idea to start a small budget label 20 years ago. "Nobody took us seriously. We're now perceived as the market leader, and we have a lot of respect. That, for me, is the most pleasing thing, having started with a humble, laughed-at budget label in Hong Kong 20 years ago."

  • To mark its anniversary, Naxos has reduced the price of its single classical discs to £3.99 until this weekend.