I think that the RIAA made a BIG mistake when it shut down Napster. That was the beginning of the whole mess that we have today. Now imagine an alternate future, where the industry actually used the brains that God gave them. Instead of shutting down Napster, they buy out Shawn Fanning, take over the web site, improve it, and charge $5/month to use it. I think that most people would have ponied up $5 per month for all of the MP3s that they could want. There would most likely still be piracy, but it would be a small subset of users that the industry could either fight or even just ignore. Remember, at this time, the RIAA didn't have the stigma it does now, so it would have been a lot easier to marginalize a small pirate community when you have a large legal Napster community to support you.
Fast forward to today, In the 8 years since Napster was shutdown, we have added movies and TV shows to the mix, and now have had 40 Gig+ MP3 players for years. In a sane world, the industry could have responded by upgrading and changing the Napster platform to accommodate those changes. New pricing structures could have been developed to match. They could have rolled out various packages -- anything from a basic MP3 only package to a deluxe "get it all, fast" package. Bit torrent could have been added to the infrastructure to make things more efficient. You still would have DVDs, Blue Ray, and CDs for those who want physical media (don't underestimate the bandwidth of a Netflix subscription). The industry could have also licensed other stores such as iTunes or Amazon store if they wanted.
It would have been a win-win situation. Customers would be able to legally fill up the 40 Gig iPods for a reasonable price ($10,000 to fill an iPod at $0.99 per song, assuming the average song is 4 MB, is NOT reasonable). CD sales would have still dropped, but with a steady, predictable monthly cash flow, the industry would have had money and time to lessen or eliminate the impact. They movie industry would also have that predictable cash flow (remember, our mythical Napster was updated over the years as technology grew), plus they would still have income from Movie theatres and DVD sales, just as they do now. I'm sure there would still be piracy, but it would be a small fringe group that wouldn't seriously impact the way that the RIAA and the MPAA do business.
Unfortunately for everyone, the RIAA and the MPAA decided to go the route they did, and now they (and we) are paying for their stupidity. The industry has spent the last 8 to 10 years paddling upstream and wondering why they aren't getting anywhere, and it looks like they aren't going to stop any time soon.