IIRC the recording industry took similar attitudes towards the introduction of VHS/Betamax, audio cassettes, and records. At least they're consistent.
If one or two of the mjor players hop onto the digital distribution bandwagon early on - as in before Napster starts to make waves - then there could be huge consequences. If say Sony decide to buy out or license the technology behind Napster and use it as a distribution method - something which would be palatable to them might be offering limited subscription with CD/recod purchases for a short time, and then offering a download service as either a pay-per-song or subscription-based service. I think that the smaller record labels might, in this case, be more likely to look at alternative means of distribution as a way of keeping costs down.
A potential knock-on of this could be uniform pricing worldwide - I recall hearing that a given CD in Australia is considerably more expensive than the exchange rate would indicate when compared with the US release.
One of the biggest changes would be that the publicity given to illicit file-sharing would be dramatically lower, if it is coopted in its infancy. The explosive growth of illegal filesharing has been linked to the huge coverage given to sites and services like Napster, Kazaa, Bittorrent and The Pirate Bay. If people are less aware that everything they've ever wanted is available, relatively simply, online and more or less for free, then this would impact both on the amount of downloading going on and on the amount of pirated material available. If you look at the kinds of services which either predate or exist alongside but with less attention the major players - things like ye olde IRC transfers and DC/DC++ - they're quite complex if not arcane to use and require a pretty solid level of computer and network know-how.
So, imagine that around 1999-2000 Sony decides to go ahead with an online store offering direct distribution, how can they nick the market that Napster has awakened? Well, from my experience, two of the issues with getting songs off Napster and similar products were the quality of the songs and figuring out what the obscurely titled file actually was. Obviously the latter problem would be trivial to solve, and with the former Sony could do something similar to how online radio often works - charge higher for better quality. The other issue for them to sort out would be whether to offer individual song sales or only sell whole albums - selling packages of multiple songs may make more money in the short term, but if another company starts offering individual sales then this could be a disadvantage.
It seems likely that technological developments in filesharing and file structure would be oriented towards the commercial market in this situation - technology like the ogg containers and the bittorrent format could become sidelined or niche products.
A major butterfly could be that if the music is followed up in reasonable short order by movies and television shows, the market for illegal provision of these materials may be reduced - and again, the reduced coverage and diverted technology may mean that the obstacles for the illegal market remain high. Pirating will continue to exist as it has since the internet began, as a niche grouping and market, rather than being as widespread and common as it is today.
There are also rather significant potential impacts down the road a bit in the video game industry. It's come to light recently that even the big name computer game makers are being hit very hard in the purse by the staggering levels of piracy associated with computer games. Crysis apparently sold in the region of one copy for every ten pirated, which has resulted in the company involved declaring that any sequels will be console-based. id software's John Carmack recently noted that the most recent additions to the Quake and Doom lines were pirated more often than not on the PC. If the technology and widespread support base for the illegal distribution of these games is not available by the time high-speed broadband becomes widely available, but instead industry accepts and endorses digital distribution along the lines of any of the models currently in use, then it's likely that PC gaming will not be in the interesting situation it is now.
