"A new way needs to be found" It certainly does, but however the music is distributed the recording process has to be paid for.
I've recently been talking to Doug Bailey at Wild Goose Records about that. He knows the industry isn't going to be CD based for ever. The problem is how to set up an economic basis for creating good quality recordings when they are sold by download. It's easy now because the majority of the sales are still CDs, even if the tracks are also available via Woven Wheat Whispers, who I agree they are doing a great job. The iTunes model seems to be working well too, but again it's mostly selling tracks that are also being produced as CDs, and I'd guess that the cost of recording is still met mostly by CD sales, not by downloads.
The music retail business is going downhill rapidly, but it's interesting to note that the biggest drop in revenue is from the high-volume (pun noted but not intended) pop music end of the market. The retailers are now far more interested than previously in the minority genres like folk music because they now account for a significant percentage of the remaining sales.
That's one reason why folk music will probably continue on CD for a while. Doug suggested other reasons too: - buyers are more likely to want the whole album, not just one song - buyers are often interested in the accompanying booklet notes that you don't get with a download. - many sales are on the back of club and festival gigs, where the purchaser has enjoyed the musical experience is ready to pay to take a piece of it away right now, without waiting to buy or download something later. Hence the growth in selling real-time CDR burns of the concert as the punters leave the venue (not in the folk world, but it does happen elsewhere)
We discussed other sales mechanisms too, such as having the retailer produce CDs on demand and pay the label a license fee per copy produced, downloading anything he didn't already have in digital "stock" on his server.
One of the problems with that and with internet based retail mechanisms is that a great deal of trust is involved, and the internet is very leaky.