Think about it though - terrestrial radio already offered music for free. Dozens of stations! All sorts of genres!
The only difference is the RIAA/major players had - practically speaking - an iron grip on controlling what was being played on those stations. Thus the free music was an enticement to purchase more objects related to that act. Live shows, t-shirts, etc.
Believe me, there's a lot more money in branding than there is in selling music. Jessica Simpson has made insane truck-loads of money on her fashion line - enough to make her music sales probably look like a rounding error. Free music isn't new to the internet, I guess is what I'm getting at.
The big difference was that music on FM radio enticed people also to go buy the vinyl LP (at $12 (or so) a pop in 1977 money. Ouch.).
So (taking us in yet another direction), the problem is one of technology: once downloads replaced vinyl and CDs, the only thing left is merch and other branded items, which sell far fewer units relative to the LP or CD of yesteryear.
The labels blew it on technology (they went from shellacs to 45s to LPs to CDs and stopped there).
I hate how these services and the record labels think only about the US/their country.
For example one of my favourite bands is Italian and apparently most of their older music is blocked on youtube in my country. There really is NO WAY for me to get the music legally. Even the torrents have very few seeders and I'm scared in a few years I won't be able to listen to this music anymore. I just hope i won't lose my backups.
But licensing is complicated, difficult to manage, and is frankly a mess. So it's often not worth it to launch in many territories at first; and in some territories, not ever.