i don't think that 'illegal' downloading is going to be an issue, at all. right now, people are het up about it because it forms some kind of fundamental problem, because the music industry is based around physical ownership of something, be that a CD, an LP or a bunch of mp3s. that is its model.
fundamentally, this isn't going to be the case. people talk about the death of the CD, but actually, I think we'll see the death of the mp3 before long, probably before the death of the CD. the simple reason is that i don't see people actually caring about 'owning' music. i don't just mean this in the sense of legally paying for things, i mean that i don't think people will care about having a copy of the music stored locally.
instead, it will be in the cloud. i probably listen to spotify about as much as anything else. it is as convenient as itunes, and has a fantastic range of stuff. right now, there is an advantage to having a local version of music; i can put it on my mp3 player. but thats it really. my computer is always connected. and, soon enough, my mp3 player will be too. i really don't think we're far from the point where we're almost always connected to the cloud, at which point it won't really matter whether we have a physical copy of the music.
as a result of this, ironically, i think the CD and LP will live beyond the mp3, because the reason people will purchase music will be as objects, not as functional things. we won't buy them so that we can listen to them, we'll buy them as something close to memorabilia.
i think this is significant. everything is geared up to the 'problem' of illegal downloading, but ultimately this is a temporary problem, akin to people taping the radio. the truth is that in the next 5-10 years (maybe even less) illegal downloading will simply be a non-issue. very few people will do it, for the same reason that very few people tape songs from the radio. it simply won't be necessary.