(consumer) Wants to listen to whatever song he likes, whenever he likes, on whatever device he has available and as often as he wants (maybe once, maybe hundreds of times), i.e. wants to feel free. For a to him reasonable price (ranging from nothing to the equivalent of a comparable service - say ... being able to call anyone he likes, whenever he likes on whatever device he has available and as often as he wants )maybe once, maybe hundreds of times) or more exactly the price of a phone subscription nowadays.
(industry) Wants to profit as much as possible for every single song, preferably wants people to pay the full-price even if they only ever listen to the song once. Want to control the consumer because they feel more they control results in more purchases.
Or in other words consumer demand and industry supply do not match. Until this is fixed, this remains the root of the problem.
Once that problem has been fixed, *then* you can think about punishments like: if you downloaded 1000 songs a month illegally, then you will have to pick up a subscription that allows you to do that legally for an amount of time proportional to your 'offense'. Sure it will cost you a bit, but you get something for it in return, something you were consuming already before anyways. Once you start paying for it you realize maybe that perhaps you only 'need' 100 songs a month, or 10 or none, and after you have paid your dues you can scale down your subscription again. I honestly believe this is the only way it is ever going to work.
It's not an easy task, for sure: it requires investing in infrastructure (cellular or broadband Internet) or facilities to 'charge' your iPod or other music at a local store or internet cafe, and maybe settling for a lower profit margin and less instantaneous income (as is the case when selling and single or album) because instead the money 'trickles' in. Of course playing your cards right could actually result in increased sales because people consume relatively more (it's easy and relatively cheaper). Rather than paying 50 bucks for 1 album to listen to over and over again, you can listen to to maybe 10.000 songs a month choosing out of an infinite amount of songs available. I know which option I'd pick and actually find reasonable to pay for.