Yes, the biz would still be in trouble.
(As Bob Lefsetz says every other day) When Napster was at its peak, so was the music industry.
After this peak, the music industry cut their artist rosters by 20% or more and release 20% fewer titles per year than during their peak. More indie titles are being released, but the good filter that used to exist in the music industry is gone, and the indie titles don't have appropriate marketing muscle to be brought to the next level of sales.
They seemingly target those within their organization with any knowledge of music. I agree that the quality of releases has rapidly deteriorated. The live concert business shows what music can sell, and the record industry hasn't responded.
The music industry sues its best customers! Their own intelligence tells them that (and this has been true since the days of cassette taping) the people who buy the most blank media and download the most (traded or paid-for) buy the most music. You may use apocryphal stories of your nephew in college to deny this, but the record companies know this.
Yes, people do buy what they can get for free! Air, water, dirt, bibles...arguments that a marketer can not compete against free are wrong, and self-hating.
Slowly, the technology, availability, and pricing structure for music downloads is righting itself. With the introduction of the CD, we basically killed the singles market that generated the album market, but downloads are the cornerstone of a new singles market. Terrestrial radio has gone back to limited playlists of the golden era of '60s Top 40 radio (tight playlists didn't spontaneously germinate in the '00s), but with the Internet, satellite radio, etc., we have more opportunity than ever to hear new music - it's just a media and a market in transition.