1) There is still merchandise, gigs, etc
That only applies to a small percent of the music industry anyhow. The Vast Minority
"The money that musical acts are receiving from concerts has soared, and has now exceeded songwriting royalties for the first time in history".small artists might actually benefit from the new distribution system
Naw, it anything it will be even worse for them since as I said people tend to explore less with charity. (Hurray for the music industry!)
"the
Long Tail also has implications for the producers of content, especially those whose products could not — for economic reasons — find a place in pre-Internet information distribution channels controlled by book publishers, record companies, movie studios, and television networks. Looked at from the producers' side, the Long Tail has made possible a flowering of creativity across all fields of human endeavour."
Think Toady One. He wouldn't even exist pre-internet. It's hard to tell how the overall picture looks like without numbers, but I still think that small and independent artists benefit overall.
there is still the issue that the old system might still be replaced by a new one simply out of necessity, with the old ways of distribution becoming obsolete
The Old way can never really become Obsolete. The problem is that the new ways people are proposing either
A) Work and are EVIL!!! (DANG IT microtranslations I hate you!)
or
B) Work but only on a small scale
The old way I was referring to is people paying for the distribution of music (not the whole non-donation based economy, mind you), instead of paying for the making of music. The hypothesis is: Distribution of music is now without cost, so there is simply no economic reason why people should make money here. Most of the middleman music industry is obsolete. Either artists find a way to get money from their customers directly for the service they provide, which is making (writing) music, or, well, they don't. Then the industry must change, and artists live from performing music etc.
As for software, the situation is somewhat different from music because the developers have significantly more control over it, simply because it's not just the recordings of sound. But even there, you could interpret certain changes as a similar paradigm shift, for example with MMOs: People don't pay for a product, but for a service...