You accept the reality and develop a new business model in respect to the changes in the environment.
Things are slowly changing but the industry is still playing catchup.
Part of the problem is that now a generation of kids have developed a new modus operandi of downloading P2P. It became the most easy and convenient option and the kids did what kids tend to do - they took the line of least resistance, getting their music at home from the PC.
Meanwhile the online music shops that slowly trickled into the scene seemed intent on scaring people away - tortuous and often malfunctioning registering procedures, very limited catalogues, clunky shopping carts. Even Amazon, one of the smoothest of e-commerce sites doesn't allow Australians to buy MP3s. You click and they say sorry, no can do. I get that in European sites too. Don't they want my money??
Compare the experience with downloading software, typing in the song title and voila! Even before Napster got big, the music industry should have seen this coming and competed. But they weren't used to competition outside of their own sphere and were - let's face it - kinda fat, lazy, greedy and complacent. RnD? What's that? Man, you meant Rn
B, didn't ya?
They missed the boat, gambling on the legal option (no doubt on advice from the lawyers) and they lost, taking their musicians down with them. Meanwhile the lawyers made a fortune conducting these counter-productive witch hunts. They are the biggest winners from this whole mess - surprise surprise
Steve Jobs was first to get the right idea with iTunes. Download the program, register, preview, and buy songs at good prices. Great model, simple as pie, but late ... the kids had already developed their systems for downloading and they figured "Why pay for it (it would need to be Mum or Dad's credit card) when you can just grab it?"
Thing is, their parents were never going to buy as much music as the last generation anyway because they were paying plenty for other entertainment technology - PCs and laptops, wide screen digital plasma TVs and Playstations, not to mention all the software.
At the same time as Napster and their successors hit the scene the entertainment $$ available to music recordings were dwindling due to competition from gaming and movies. Cinema has the same problem. Gaming technology, both in the home and bars and clubs, is crippling the arts. The people have gone away and smart artists like Radiohead are trying to work out ways of luring people back to music.
What the band did was based the same principle as a shopkeeper stocking loss leader products. They deal with a theoretical loss (in giveaways or bargains) so as to gain other sales. It's also a goodwill gesture that that associates good vibes with their "brand".
Then there's the rampant pirating going on in China ... probably a lost cause, given that they are now the most powerful nation on earth. So the challenge is mostly about the west and Japan ... how to entice people to get back into music - and to make the purchasing experience painless.