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Even if the labels went away, people would still make music, but just for fun. However, there might be less artists on tour, and people would have to raise the money for it.
I think that people would give respect and become interested in amateur artists. I heard in Persia and other countries, people do exactly that. Even in this country, people still attend middle school, high school and college concerts, local band gigs, and other amateur artists that perform locally.
I predict that CDs would still be made, and sold, but in much smaller batches. I also bet that distribution, radio, and the music you find in stores will be different from city to city, and much more localized.
One of the ways bands will reach new audenices in the future, I predict will be the internet through web sites, P2P networks, internet radio, and the like. Another will be word of mouth.
I predict that getting to "superstar" status with world reconition will be quite hard in the future. Labels and DIYs simply cannot afford the "one chance to make it big" risk anymore. Becoming a superstar will take a big buildup over time, and will be a very rocky, bumpy road the entire way, and a very slow process.
But there is some good news. The cost of recording an album has reduced significantly. Programs like Protools can be used to record albums in ones home or other establishment. You basically need an audio mixer, some mics, some cabling, and a computer with a good sound card. Even some powerful audio recording software (such as Ardour) have been open sourced, and available for free.
I think that the music biz is going through major changes, but will survive in some form, probably without as much control as it once had.