The RIAA say they think that's the question.

As you'll probably know, the RIAA, backed up by various @$$holes like Metallica's Lars "Whatshisface" and a certain dr. Dre, are suing Napster in order to have it closed down. According to the RIAA & Co, the service offered by Napster encourages large-scale piracy, thereby ripping off musicians and record companies alike.

The Issue

Music exchange is not a new phenomenon. With the good old compact cassette rapidly gaining popularity in the mid seventies, people have been exchanging music ever since, and the record companies have been whining ever since. Anyway, since audio quality of cassettes was quite inferior compared to vinyl, people would buy the music they really cared for anyway. Today, the situation is quite similar. MP3s can't compare to well recorded CDs for sound quality, and people continue buying CDs. In fact, while the RIAA asserts sales of recorded music are dropping due to Napster, sales statistics appear to show a steady increase.

Now, suspicions arise that the five major record companies (who gained control of about 90% of the market following a continuous series of mergers) are pushing up retail prices through "price agreements", which is illegal in the US and in Europe as well. It may well be that the consumer has been ripped off for about $2 on every CD sold over the last few years. The "official" explanation for this state of affairs is that it serves to protect smaller retail outlets from excessive competition by large online stores and chain stores such as Wal-Mart. In itself, a noble proposition - but recent history is riddled with tales of corporate greed in disguise.

Not only consumers are getting ripped off, also the musicians - and probably even more so. The average recording contract is such that average selling artists will hardly earn anything off their sales, while the record company will make conspicuous amounts of money.

Meanwhile, among musicians opinions vary widely. Some are rabid anti-Napster - see Metallica. Others feel that yes, the use of Napster does infringe copyright, but there are worse ripoffs to worry about. However, if there would be a way to get copyright payments out of the use of Napster, it would be most welcome. Quite a few musicians feel that Napster is a very nice promotional tool, especially for non-mainstream music.

Some Points...

Napster is an invaluable tool for locating obscure, old and long-out-of-print material.
This includes bootlegs of course. Said material is absolutely essential for anyone who's seriously into music, and almost impossible to get hold of otherwise. A handful of tracks that I've been after for years (no kidding) were located and downloaded in a matter of hours after I first installed Napster on my machine. The recording industry could not care less... But had the material in question been available through normal retail outlets, I'd have bought it a long time ago.

Large scale illegal CD copying is a far more serious revenue threat for the industry.
You can buy any recent release from mainstream industry cash cows, for about one fourth of normal retail prices, on CDR complete with color-photocopied inserts. Now that's piracy. But CD burners haven't been outlawed yet...
The real reason why the RIAA is getting really nervous about Napster, is that it may provide a marketing tool for those musicians who (rightly so) wish to bypass the industry altogether. And a good many musicians have every reason to do so.

Music exchange has been fundamental to the education of almost every person involved with contemporary music on a professional level.
Being a musician or an engineer requires one to listen to lots of music. With retail prices of recorded music being as they are, most people have to think long and hard before spending their hard-earned money, especially considering that said formative experience usually starts when one is in his/hers mid-teens and probably doesn't have a huge budget to begin with. Stamping out the time-honoured usance of exchanging music between peers, the industry might well find itself short of their prime material in some time. Most lawyers tend to be dreadful musicians...

And the bottom line:
There's no reason whatsoever why a CD should cost $18 these days.
Except for the usual "corporate greed" of course - see the remark above. An excellent band here in Italy is selling its CDs at £it 12,000 which at the time of writing equals less than $6. And mind you, we're not talking about some obscure low-brow band or albums recorded in the local basement studio. The band consists of accomplished professional musicians and the albums are well-engineered. The reason for the low price is one and only: No major record companies are involved. If Napster users can be accused of theft, then the industry should be accused of highway robbery at least.