I for one have used Spotify in the past. I no longer use it because every couple weeks I had to hunt down a British proxy in order to log in--Spotify isn't available in the US yet, hence the proxy. However for the two months I did use it, I loved it. The music library is a decent size, the playlists work well, and it even has the ability to have collaborative playlists. The creator of uTorrent, Ludvig Strigeus, is involved with Spotify. Granted, Spotify did not stop me from downloading music due to needing to put music on my iPod, I did download a lot less during those months. Spotify allowed me to listen to complete albums without needing to download first. This resulted in me only downloading the albums I really wanted on my iPod. Also, probably the most convienant part of Spotify was that I was able to set my laptop out at parties and people could add almost whatever song they could think of onto the playlist.
Spotify will not replace downloading, but I do believe that it will significantly reduce it.