The independent retailers will definitely pay the greatest price in the short run, and it's sad for me to think back to how many record stores were around 10 years ago and compare that to now - in just the last few months, two of my favorite shops in the STL area have closed their doors (the Granite City, IL, branch of the STL indie juggernaut Vintage Vinyl, and Music Biz in Alton, IL - bye guys, and thanks for having been around for as long as you were). But in the long run, it may be the independent retailers that are the last ones standing. Because although I believe that the music industry as it has existed is indeed on its deathbed, I don't believe that the CD itself is, and I for one am not going to grieve overmuch the death of the major label system. The death of a system in which the people creating the actual product are the last ones to profit from it really cannot come too soon as far as I'm concerned.
I look at one of my other pop culture obsessions to see how things might shake out - the comic book. Decades ago, the damn things were ubiquitous - drugstores, newsstands, grocery stores, dime stores, airports - every place has a comic book rack. Millions upon millions were sold every month. (For example, the original run of THE X-MEN was cancelled because its sales had dropped below 200,000 copies a month, which was considered a dismal number back in those days). By the early 70s, things were starting to change. The golden age of comics was one of the many things dealt a death blow by the coming of television, and though they continued to hold their own through the 60s, by the 70s those comic book racks started disappearing from the grocery stores and drug stores and everywhere else they used to be - they no longer turned enough of a profit to justify maintaining their presence.
However, there was still enough of a demand for them that they continued to be produced. But distribution switched from everywhere imaginable to specialized stores that dealt only in comic books. Most of these were independently owned, and, give or take a few boom times and bust times, this has been the business model that the comic book industry has stabilized and survived around since the late 70s and early 80s. Currently there are probably more different comic publishers and titles than at any time in the history of the medium, and comics have even begun creeping back into some of the old places again - you can buy SUPERMAN or SPIDERMAN in grocery stores again, but you aren't going to find ACME NOVELTY LIBRARY there.
So I can very easily see the same thing happening to the music industry. As most of the people here have posted, people DO still like to buy the physical object. Industry surveys have found that while yes, people are increasing the number of things they download, they still also will buy the physical discs of the albums - albums are still going platinum, although nearly everyone has the ability to download now. If everyone wanted to only download everything, this would not still be happening - but obviously, there are still some discs that people feel there is a value in owning the physical disc. EVERY person I know who downloaded IN RAINBOWS also went out and bought a physical copy when it was later released (granted, this is in no way a representative sampling, but still it does seem to mean something.)
In their interview on Fresh Air the other day, Mick Jones & Tony James both commented on this - their original plan was to only release Carbon/Silicon material online, but they found that people WANTED to buy it on disc, so they complied.
So is the music industry as currently configured going to survive? Who gives a damn, other than label employees? Ingrid Michaelson is not signed to a label, as far as I know, but she's been discovered by Old Navy and GREY'S ANATOMY, and her disc is available at Wal-Mart and Borders. The internet gives every artist the ability to be their own marketing department and it seems to be working out for some of them better than it ever would have if they'd signed to a label and had to take a back seat to the latest Beyonce disc.
CD sales may be dropping, but I imagine at some point they will stabilize - I think there is a core of people who will always want to own the physical object. Will that point be below the point where it's profitable for Best Buy or WalMart to maintain a CD section? I couldn't give less of a fuck. Just as the disappearance of comic book racks from the local pharmacy created the entire comic book store industry, I think the disappearance of music sections from big box department stores will recreate the need for locally owned music stores.
It will possibly happen in the same way, even. As comics became less and less profitable for the old retail locations, those locations began to stock only the titles they knew would sell. Thus, SUPERMAN and BATMAN remained for sale everywhere, but innovative comics in that era such as MOON KNIGHT or CEREBUS THE AARDVARK or HOWARD THE DUCK soon could only be found in the comic shops, driving traffic to those stores. Soon, those were just about the only places comics could be found at all, but by that time it was catering only to its core audience. So in some ways it was only a shadow of what it once was, but it was and remains a relatively healthy shadow.
The same thing could (I think will) happen with music. As the number of CD titles available at TARGET dwindles down to Cristina Aguilera, Fall Out Boy and Beyonce, people looking for the Flaming Lips will have to go to the smaller, locally owned stores. It'll be a reversal of what's been killing the indie stores over the last decade - the big boxes could buy in bulk and undercut the prices the indie stores could sell discs for, and this strangled a large number of the indie stores out of business. However, as falling demand for CDs cuts down on the number of CDs the labels actually produce, the price advantages for buying in bulk will disappear (hard to buy in bulk when there is no bulk anymore) and prices will begin to even out for the indie retailers vs. the big boxes again.
So I think that the indie stores that can hold on through the transition going on right now will come out at the end stronger. The number of places CDs (or SOME physical representation of music, at least) will be available in the future will be greatly reduced, but the locations that survive will be in a good place, where they will be catering to the core musical audience.
That's my take on how things could shake out in the years ahead. I'll admit that downloading of music is an additional factor that comic books did not have to contend with in its transitional period, but then again, it had to fight with the rise of video games, which in some ways were its electronic nemesis. But the comic book industry survived, and in some ways is more powerful than ever - just look at the increased media coverage the San Diego Comic Con gets every year now. This used to be perceived as a gathering of nerds and losers. Now the movie industry shows up every year on bended knee, asking the assorted nerds and losers in attendance for advice on how to proceed.
I believe that future state of the recorded music industry will look somewhat similar. So while it's sucked the last few years and the predictions are increasingly dire, I am honestly optimistic about the future. I think CDs will always be there for people who want them.
Did any of that make any sense, or was all this the painkillers I'm on for the damn shingles talking?