Zeev, Typically, a CD will sell for less than $10 and will have 8 to 12 songs, so he thinks that the pricing, even if there were no free sites, is excessive.
CDs must be cheaper where you live. Just over the weekend, I picked up the latest J.Lo CD for $15 plus CA state sales tax. It has 12 songs on it, so getting it via iTunes would be a good deal, even if I wanted all of the songs (which I don't). Of course, I wouldn't get the jewel case and printed CD insert, but that's just collectable stuff.
That leaves the question of free music, which as usual affects the entire recording industry, not just iTunes. But consider that even with all the free music available, CDs are still selling. Add the user-friendly interface that Apple is good at, and you've got a service that I'm sure many people will indeed pay for.
Tenchu