There's been an interesting debate going on about restricting peoples broadband if they download music illegally, I haven't done it for ages, I usually just listen to it through something like Last FM, a radio station with no DJ and more importantly no adverts or crappy pop music, it's there if you want it, but you don't have to listen to the same playlists day in, day out.
Cover versions are killing music, the same way reboots are killing the film industry,
Whether it affects the music making process, is doubtful, it affects the money making process for sure, but people still make music, most musicians I know get by, they don't have limos or do tv ads, they just make tunes.
The music industry might be failing, but people will always make music as they have for thousands of years.
What worries me is that the policing of the downloads will become an invasion of privacy issue, where the checks won't just be on music or film, but personal emails and everything else. Not that your emails aren't already recorded, but this would mean it would be legally acceptable.