For a start, I say we owe a debt to Sir T who is willing to share is professional knowledge and insight with us. Nevertheless there are a few points where, just maybe, Sir T is burdened with conventional "insider" thinking.

Quote Originally Posted by Sir Terrence the Terrible
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Giving away content does not equal a financial killing, and it can never in a market based economy. When the cost of producing and distributing an album fall, then it can address the fact that consumers want the product for less. At this point the pendulum falls for the latter far more than the former. While studio time costs have dropped, (quite a few albums are home recording studio based), the sheer numbers of advertising outlets have not, which means it costs more to advertise the product than it did pre internet. Artists demands also keep increasing which keep costs up. Touring costs have increased, as has mastering costs. While manufacturing costs have dropped, licensing and copyright costs have dramatically increased. There is nothing in a market driven model that has decreased, so giving your product away pretty much guarantees bankruptcy if you don't scale your costs with market driven production costs.
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Interesting points. As for advertising, it isn't an inherent production cost; you spend just and only as much as you thing you need to to sell product at a profit.

Licensing & copyright costs may well have risen: Aye, there's the rub.

Artists demanding more? Really? Well, some artists no doubt. Others are just glad for any exposure.

Quote Originally Posted by Sir Terrence the Terrible
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Downloading albums are high basically because the market is small. To justify the costs of licensing, royalties, distribution, and profit in a market driven economy justifies the cost. None of these has gotten cheaper with digital distribution, it has gotten more complex and expensive. While it has gotten cheaper to distribute over is physical distribution, (CD, DVD's and Blurays) because that model is mature, stable, and predictable in some ways. Digital distribution is not. Once the digital file is sold over the internet, its distribution predictability becomes nil, and that drives up the cost of the file as a result of copy protection, terms of usage, and various other complexities that most do not think of. Also the apparent value of the product is diminished with digital distribution, which does not coincide with the cost of production, and why film and music concerns were too slow with dealing with digital distribution. The question becomes how can I produce a product with mass appeal, but with costs that are constrained by a consumers value beliefs. This is an impossible equation to equalize today.
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Let me propose that downloading is "small" because prices are high -- like I said earlier, the alternate theory may well apply which is that consumer demand is much more flexible than insiders presume and the lower prices would boost demand to the point where revenues would actually be higher.

It's pure balderdash that digital distribute is more expensive than physical -- this is assertion is just as outrageous in fact as it seems on the face of it. If the value of the product is diminished in the eye of the consumer, it is for the intuitive and valid reason the digital distribution is cheaper.

... Or it ought to be. If iTunes can't make a profit selling songs at $1 per, that's corporate incompetence. We had this out a few weeks ago. Per unit distribution cost appears to be under 8 cents a song; it's the exorbitant licensing that accounts for most of the all the rest, possibly excepting advertising ... about which see the comment above.