Not Entirely Unrelated Cartoon
I drew a cartoon about this today: http://www.conniptions.org/index.shtml?20090209
Arguably it's not the internet that is making life difficult for musicians economically. It's recording itself, and the widespread availability of cheap high quality playback equipment.
Not so many decades ago any halfway competent musician could make a living from paid gigs without too much trouble - you couldn't put on a dance anywhere without hiring a band, there wouldn't be music in the cafe or restaurant unless musicians were hired to play it, etc etc. Every dance. Every place where you wanted music. It was all live. So there were orders of magnitude more gigs around for musicians and livings could be made.
Technology moved on, and that world is gone.
There was a short window of a few decades when a relatively small group of people made money from recordings, some but not all of whom were musicians or songwriters - and the death of this situation is what the original article is complaining about - but again, technology has continued to move on and that world is gone too. My point is that in the long scheme of things that period was a blip.
I don't think anyone has any answers yet.