"You can't look on that as a lost sale."
Neil Gaiman is a pretty wonderful writer, but this short video might be my favourite thing he's done. The model he talks about applies slightly more directly to books than to music, but I think it holds. Look at a band like Across Tundras and ask them whether they think offering up their albums has reduced sales.
Yes, there are kids who will download every album that comes out in a year, and yes there is a small minority who will never buy anything ever again (because they're assholes), but in general humans want to support the things they love. I am firmly, 100% in favour of artists getting paid for what they do (and as Warren Ellis says, you don't go and steal a house a builder bought), but I have never understood how passing things around before you buy them threatens that.