I still contend that 90% of all illegal downloads comes from people who weren't going to buy the music anyway.
The problem for the music industry is that piracy opens the world up to a larger variety of music. As a result, it's almost impossible for the industry to dictate the music trends. In this modern world it's much harder for the industry to ram "She Bangs, She Bangs!" down our throat.
My cousin was so happy when he got a six record deal ten years ago. Then they promptly shelved him for the duration of his contract. Turns out my cousin sounded too much like their cash cow, Marc Anthony. These shenanigans happen all the time. In 1998 the record company shelved Chuck D, stating that market research showed that no one was interested in Public Enemy anymore. So he circumvented the record company by releasing the album on mp3.com and it went on to become, up to that point, the most downloaded album of all time. though he lost the battle with the record company, he was able to, thanks to digital downloads, rub egg in the face of the label execs.
What the record labels are most afraid of is not piracy, it's the fact the digital era and the internet is going to render their services obsolete. Who needs a record company when you have the internet?
The recording industry needs embrace piracy and re-adapt their business model to one that embraces the advantages created by piracy. As this article clearly shows, though album sales are down, concert sales are way up, and so are sales of paraphenilia. If you don't think the piracy model can't make money, then take a look at the Grateful Dead. They asked their fans to pirate their songs and to make bootleg tapes and distribute them freely. Then they went on to make a fortune on sold out concerts, t-shirts, books, magazines, etc.. They became the highest grossing act of their time!
One last thing, another reason for more sales is that now you can buy your music unencumbered. That's major. DRM is terrible in that it severely inconveniences those who are trying to do the right thing. Meanwhile, the people using pirated goods have the freedom to play their music anywhere and on any machine or gadget they want to.