The music distribution system was broken several years ago. Steve Jobs was able to put humpty dumpty back together but its all bandaids and scotch tape.
The iPod is a fantastic device in lots of ways, but the iTunes distribution process is ugly. iPod has about 75% of the portable music player market and this is a giant influence on music downloads. Album sales in the traditional sense have been declining year after year, but there appears to be a little light at the end of the tunnell.
First, the portable music download industry is growing and there are more choices available to consumers. Many still go with the default of iTunes, but with heavy hitters like Wal-Mart and Microsoft and many more trying to carve out a slice of pie, pricing should improve.
New technologies are also pushing growth into areas such as Podcasting -> named not so much after the iPod but coincidentally at about the same time the iPod launched and when it was still marching up to its first million units sold.
Video and other types of media are starting to grow more dominant on the devices themselves and as Google has recently purchased YouTube and Brightcove has launched its beta after signing a deal with MTV, we could begin to see the model changes as music mixes into the state of things.
The bottom line is that a dollar a song business model thrown out there back in 2001 is really no better than the $15 dollar a CD (for 15 songs) model the music industry offered in the years leading up to Napster. The internet is a great leveller and as more and more artists are moving into music distribution spaces such as MySpace there is ample opportunity for many of the major players to stake out a new territory or have their industry handed to them on a plate by a start up.