spuke4000 - you are correct in what you do say: "I thought it simply meant that you could make money off the obscure stuff when your distribution costs went to zero (because of the Internet)."
you are missing part of what the "longtail" means. It's not really that you "can make more money off the stuff" because before your costs went to zero, you had to make decisions not to sell stuff below a certain point in the tail.
Not only has the stuff in the long tail become cost effective to sell, but (and this is as much a key as what you said) the stuff in the long tail has become "more discoverable" by consumers. (because of internet technology, namely recommendation engines, tagging, categorization, and social networking) The consumers "cost to discover" also goes way down.
Read "the long tail" by chris anderson. His findings are all backed up by scientifically designed experiements and professional statistical analysis.
with that said, I don't think blockbusters are going to suffer, they will still grow, but so too will the long tail titles. It's not a zero sum game. Even if dispiosable income stays the same, the cost of blockbusters has decreased, allowing more discretionary spend in the long tail....blah blah now im just speculating.