It's not so much all users are people who decided to share their folders on KaZaa and similar services. It makes sense if you're out to cripple them because that's where the files are coming from. A lot of people are free riders, don't share, and so are "safe."
I am conflicted about this. While the music industry has its evil aspects, not paying for music that that they distribute seems to be smugly convenient form of social protest. I work in the software industry, and if people decided they were just going to ignore agreements and laws that the rest of society accepted, I would not get paid. This is even though I also accept that a lot of software agreements are not in the best interest of the user, let alone society.
Part of the problem is that fair use in the digital age is only different from circumventing copywrite laws as a matter of degree. So I made tapes for people back when that was the thing to do, but cassettes didn't sound as good as records, you didn't get the original package, and the whole process was slow. Nowadays, any schmuck with a computer, scanner, printer, and burner can duplicate CDs (in both senses of the word, digitize and make concrete) in a matter of minutes. So it's like having a tape tree where your set of next people on the list more like two hundred than two. That kind of technological difference can't but have an effect on the threshold that people will go over to actually buy music.
I can (and do) post interesting MP3s on the net for my friends, and while it's password-protected, there's nothing stopping them from redistributing these files, which can be downloaded by others in a matter of seconds if they have the right connections. Most of the artists I listen to are not exactly super-popular so I just hope that my friends will go off and buy the stuff if they like it.
Maybe the real problem is promotion, not copyright. It's not all of the problem because on net, you still need to know what you're looking for. So you can't search for something new and interesting unless you know the name to begin with. But, it does seem to be the case that free MP3s are good form of promotion and much cheaper for everybody than videos or radio, which is still suffering from payola. For example, try out epitonic.com for new artists; you will find lots of high-quality free, legal MP3s and information about the artists. Linking artists together also encourages browsing and functions like a form of self-directed recommendation.
Probably the most equitable arrangement for mature and niche artists is to sell CDs direct, so that they get a bigger cut of the proceeds. The problem with CDs is that you still need promotion (which is cheaper on the Net the but the Net is not everything), and paradoxically being very successful requires the kinds of resources that a real record company has -- it can finance large press runs, hook up with other companies for licensing deals, and so on. And indie labels that reflect a certain kind of taste still make sense. Maybe the future model will be something like Nonesuch, which is part of a very large conglomerate (AOL Time Warner) but acts like an indie in terms of its artist roster. The big artists like Madonna can license out their own material.
But I am pretty pessimistic that selling music as pure information is going to work out. Current protection schemes are hard to use and don't work with all the devices that people expect to listen to these days. MP3s are great (and most people don't care about that last 10% of sound quality anyway), but there's no incentive to pay. (I don't have anything to say to anyone who doesn't want to pay unless the entire supply chain is morally pure, by the way !) The content industry's techno-fix would be fix all the hardware in the chain so that only digitally-signed/approved material could be actually copied from one part of the chain to another, all the way to the speakers/headphones. In other words, try playing an MP3 that you ripped from your own CD, and the USB speakers won't play it. It's a technical problem that can be "solved," but the "solution" is so complicated that even if it's not cracked for a while, it will be so restrictive that no consumer will want to use it anyway.
I think having to pay for something physical at a low price that makes the convenience worthwhile is pretty much the only fair way to do it right now.
That is all.