With stadiums emptying and album sales dropping, the music industry's focus has begun to return to its primary unit, the old-fashioned, three-minute pop single. And nobody is better positioned to capitalise on that than Pete Waterman who, as part of the Stock, Aitken and Waterman production combine, helped define the Eighties, with the likes of Kylie Minogue, Jason Donovan, Rick Astley and Bananarama.

Waterman is back on form with his line dancing phenomenon, Steps. Their debut single, "5,6,7,8", became the biggest selling record of the decade not to reach the Top Ten, while the follow-up, "Last Thing on Your Mind" sold half a million copies in the UK and is busy taking off abroad.

The years between Kylie and Steps have not been kind, though, and Waterman puts the failure down to a disastrous deal with Warner Music. "It wasn't their fault, it was mine - they gave me everything I wanted except creative freedom," he said. "Over the past five years, I've compromised far too much - it doesn't work. Their view of life contradicted what my gut instinct told me. We signed rockier and more serious acts. I'm about frippery, dreams and stars. I'm back on a roll because I've said I'm not listening to you all. You can love me, you can hate me, but I'm having hits. You don't like Steps - I'll give you 10 of them. Be prepared to hate me even more."

Waterman claims he knew they would be a success from the first time he saw them: "I instantly saw that if Abba were going to be recreated in 1998, it would be Steps. It was what has been lacking for a long time - it was so honestly what it was: it shone as a pop record. I had a shiver down my spine and goose bumps. That feeling has never let me down."

The first time his insides reacted to music was in 1961. " `It Might As Well Rain Until September', and `Locomotion' by Little Eva, changed my life at the Locarno ballroom in Coventry on a Tuesday night session. I thought, `This is for me. This is what I have to do for a living.' I was more moved by a piece of plastic than all my mates were by chasing girls."

Waterman joined the business in 1969 as a way of getting a job on the local radio stations that were opening up; his one ambition to become a disc jockey. He soon landed a job at Magnet Records, whose best-known act was Alvin Stardust. Waterman had never been outside the country before he was sent to the Cannes Music Festival. From the Magnet stand, he could hear a thumping noise through the wall. He went round and demanded that the German record company next door play it to him. "I said, `It's a smash'. I was busking it big time, I didn't really have a clue. I thought to myself, `Keep going, son, you've got this guy hooked.'." He persuaded an acquaintance to buy it for the American market and out of gratitude was given the English rights for free.

"The group was Silver Convention, but more importantly the lead vocalist was Donna Summer, and it was that song which started the whole disco revolution. Disco came about because I liked something through a wall, because in those days nobody took a blind bit of notice of German music companies."

After signing Chris Rea to Magnet, he became John Travolta's A&R co-ordinator, picking the singles from Grease and Saturday Night Fever - all for a salary of 100 a week, plus the odd Jaguar.

Money is no longer a problem. Waterman has now sold 500 million records as the purveyor of what he calls "just music to dance round your handbag to". It is not just his own bank balance which was swollen: "I've made over a dozen people millionaires and upset every last one of them because I'm honest. I'm not going to lie to you. Just because you're now a millionaire doesn't give you any more intelligence than when you started. A hit does not raise your IQ. However, every artist I've met has one song on the charts and their IQ goes up 500 per cent. I've seen kids walk off the streets, go to No 1, and then tell me how they did it! When you give somebody five or six million pounds they think theirs is the only point of view. And I'm not frightened to walk away from that sort of money. If I don't like something, I'll tell you it's crap, and I don't care who I offend. Music is too important to me.

It is not just pop fly-by-nights he's clashed with. "My honesty got me into serious trouble with Paul McCartney," he says. Following the Hillsborough disaster, he organised a group of famous Liverpudlians to update "Ferry Across the Mersey": "Paul goes into the booth and the boys are really impressed, while I told him to get a move on because I had Holly Johnson coming at three. The engineer told me to shut up because he was warming up. I replied: `For Christ's sake how warm does he want to be? I've got this record moving into the factory at six.' Paul did this vocal that is unbelievable. I went bolt upright as he performed. He asks how it was and I can't reply because I've lost my breath. Finally I replied `great' but he wanted to do the middle again because he had gone out of tune.

" `Trust me' I told him, `we've captured the emotion on tape'. He listened and insisted on doing it again but I stood firm. I was the producer and he was the artist and I ordered him out of the studio! The next day Linda McCartney phones. Since her death I especially treasure that call. She said: `The kids and me think this record is magnificent. We love Paul on it and where it goes out of tune, the emotion was incredible. You're probably the first guy in 20 years who's stood up to Paul. People don't tell him the truth'. That was a greater thrill that the record reaching No 1."

Waterman is not content to settle for a quiet life and the odd hit. "I can't keep telling people I was big in the Eighties - now I'm big in the Nineties and it feels great. I can't rest on my laurels, I've got to do it all again. It's different this time because I'm 51 and can appreciate how difficult it was back then - because we were accused of everything except mugging and rape. Now I can relax and smell what the roses were like then. People always said to me, which I never denied, that I copied Motown." Although complemented on his hit factory by Motown founder, Berry Gordy, Waterman is still not satisfied: "In my mind I never copied Motown because I didn't do it as good as he did. But I will this time!"

While many people working in populist branches of the arts long for the acceptance of their peers, Waterman is honest about his work: "I'm like a kid in a bedroom who gets excited about something, listens to it for a couple of weeks as they bounce up and down on their bed. After four weeks they buy the next one." Amazingly, people all over the world now collect his records, rare copies fetching thousands of pounds, with countless Web sites devoted to his oeuvre. Waterman is not impressed, though. "I never play any of my old records because they are magical at the time," he says. "Live the memory, don't live the sound."

The secret of Waterman's success is that he feels the same excitement when he hears a new pop song as he did back in the Locarno. "I still am a child at heart - my staff call me Peter Pan. I'm told I'm eccentric because I collect racing cars, trains and go fishing in India. No, I'm not - I'm a kid, and if I find something fascinating I want to do it and, unlike any child I know, I can drive a racing car if I want to."

These days Waterman is bouncing on his bed to Steps. He is proud of writing "Last Thing On My Mind", having always believed in it, even when it flopped for for Bananarama. "I've always wanted to do an album called AbbaBanana, and everybody laughed, but I've achieved it with Steps." With a new, even more Abba-influenced single, "One for Sorrow", out this month and an album next month, Waterman is undoubtedly back. Perhaps with pure pop back in fashion, we might all become retro-kids and start bouncing on our beds, too.