According to Felix Oberholzer (Harvard Business School) and Koleman Strumpf (UNC-CH), music downloads don't affect CD album sales. (Link is to 369K .pdf file.)
And this article claims that CD album sales in Australia are doing just fine.
UPDATE: But this paper, by a new Chicago Ph.D., suggests that piracy does have a statistically and economically significant effect on CD sales.
Looks like another battle of instruments. I'll need some time to try to sort the issues out.