I thought I'd introduce an oft-overlooked example that may support the original poster's idea, at least in literal terms if not in underlying message.
Nine Inch Nail's Ghosts I-IV.
- Creative Commons licensed, making it free - and legal - to redistribute
- The artist released the first 9 tracks themselves via Torrent, 320kbps MP3
- The artist has also made the album available in ALAC and FLAC, directly from them for a nominal fee, and freely redistributable under the same CC license
- For those who want a physical product, you can purchase directly from the artist a traditional CD set, up to a limited run box set that included all the tracks in each song in .wav and a blu-ray disc mastered at 96/24
Whether you appreciate the music or not, as an experiment in an artist directly harnessing new distribution mediums while still caring about audio quality, this was an incredibly interesting move. I think that, reviewing the opinions expressed in this thread, this was something almost everyone could agree on as "
The right way to do it."
That said, I'm sure that an undertaking like that is far easier for an established and well-funded artist than it would be for a smaller, less widely known or commercially successful act.
That doesn't mean it wouldn't work, just possibly not to the same scale - and starving artists with small fan bases can't place gambles on making their living on collectors editions, and hoping one person doesn't download the whole album for $5 and share it with every other fan, netting them all of $5 income.
Quote:
Originally Posted by ROBSCIX 
I still buy CD to use as my backups. I load them into my system in lossless format and put the originals away.
To note: Many bands make a great deal of money from live shows also not just music sales.
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Thanks for bringing this up - as this, in many ways, covers some of the gap for aforementioned smaller-scale artists.
Another "digital distribution medium" that doesn't necessarily address the CD question originally posed, but has tangent relevance to the discussion, is internet radio. Let alone Pandora - an application that does its level best to scientifically identify new (to you) music you're likely to enjoy - there are thousands of unique stations on the shoutcast network alone.
I can personally attest to having given small and obscure artists (and, of course, hole in the wall venues) many thousands of dollars in tickets and - my favorite way to patronize an artist - t-shirt/merch sales in the past couple years alone. I'm fortunate to live in a city that prides itself on a live music scene, and I'd have to say I enjoy a live performance more than a hi-fidelity home listening experience. I'm pretty sure the artist would rather have me hand them directly $25 in cash for a t-shirt than buy a CD from Amazon for $15, for which they receive such a minor cut.
My point being, these are artists that I discovered via those dicey 128kbps mp3 streams, listening to their work free of charge. Streamrip -> iPod -> 5 stars if it's good -> research when you get back home is an amazing way to broaden your musical horizons.
So, yes, CD retains its virtues for quality of sound (honestly, what this forum is about, sorry to be so off topic) but does not occupy that perch exclusively - nor does the proliferation of cheap/free (legal or not) digital music always incur the damage it's so frequently accused of.
And hell, 128kbps beats the snot out of commercial FM radio.