Cory Doctorow has stated it (at BoingBoing) with such remarkable clarity that you can hardly think otherwise: the trade in illegal audio downloads is exactly what is fueling sales of songs. First the numbers, from Forbes:
"According to the NPD Group, consumers purchased 25.9 million songs in March 2005, 52% more than they bought a year ago. Consumers also downloaded more than 242 million songs illegally this March, up 25% from March 2004." Then Doctorow's observation: "If the only way to load 10,000 tracks on an iPod was to buy them at $0.99 each from the iTunes Music Store, would there be much market for iPods? And without the market for iPods, what happens to the Music Store?"
So the availability of no-cost music causes people to buy players with large amounts of storage, which they then fill, at least partly, with purchased music.
Bear in mind also, the "worst" cost (to the music industry) of those illegal music downloads. This calculation changed just recently when Yahoo opened their new music service. Yahoo charges about $6/month to download all the music you want without DRM restrictions. So in general 100 people who download 100 songs a month for a year could have paid yahoo $7,200 to do the same thing legally, or about $0.72 per illegal copy.
In about 1984, the company I was working at decided that they were buying far more floppy disks than they needed. Every programmer needed a bunch of floppies, but the purchases were high enough to suggest strongly that many people were just taking floppies home for their personal use. Management set up a "checkout" system, where you had to sign out every single floppy and indicate what you would use it for. At that time, floppies cost us about $1 apiece. We complained that the people time necessary to check out the floppies would cost the company more; and of course developer time is precious. After one or two cases where a developer who had been kind enough to work till midnight could not check out a floppy from the locked cabinet - and delayed a deadline - the checkout system was dropped.
The draconian DRM systems the music companies are developing to protect their precious audio from copying seem to fall into the same category as the checkout system. The current lost sales are a small cost of doing audio business. Enforcing DRM will cost us and inconvenience us and damage the audio market. We've got to protect this industry from itself until they come to their senses.
I'm not condoning illegal copying. Here's a suggestion: the big audio companies should do what one classical pianist does, and release free tracks of music in unpolished, noise-afflicted form. There would be lots of live performances and recording session tracks. Then people would buy the finished, high quality tracks of the music they like.