John Lettice reports in the Register on a paper delivered by Microsoft researchers saying file-swappers will win in the end:

Growth in consumer access to broadband will make distributed file sharing networks more proof against such attacks, and in the interim a resumption of smaller overlapping groups, together with systems whereby hosting is compulsory for members, will mean the content will still get swapped. And the factor that slows up distribution at the small group phase, lack of a central index, will eventually be overcome by comprehensive distributed indexes.

So stuff will always get around, it'll get around faster and faster, and although you can lawyer the odd Napster out of existence, ultimately lawyering is futile (you guys sure you work for Microsoft?)

....Watermarking will always get cracked, and key-based protection will always be overcome by key leakages. They've some words of good cheer for Senator Fritz Hollings, who wants to make it compulsory, here:

"Proposals for systems involving mandatory watermark detection in rendering devices try to impact the effectiveness of the darknet directly by trying to detect and eliminate objects that originated in the darknet. In addition to severe commercial and social problems, these schemes suffer from several technical deficiencies, which, in the presence of an effective darknet, lead to their complete collapse. We conclude that such schemes are doomed to failure."

....Vendors should therefore compete on price and convenience. This is a moving target, because it's dependent on the level of the price and the increase in convenience over stealing the stuff instead. So for music, the price of unprotected legal content would have to be quite low, and the convenience quite high, whereas for video the price could be higher, because the darknet hosting bandwidth isn't up to it yet. Think about it being just nicer to not steal than to steal, and how that could be achieved in particular areas of content. [The Register]

Sounds like everyone would win under those circumstances: consumers get a reasonably-priced, efficient, friendly source of legal music (and video); content-providers get loyal, happy customers who won't be much tempted by the allure of "free."