Napping
You're forgetting that the mindset of the general population 10 years ago wasn't one of "grab what you can for free off the network". Before so-called universal broadband, everyone was well used to paying for their music, or otherwise putting up with a tape or, latterly, CDR copy (I know I'm generalising a lot here but I'm trying to be quick). There was a window of opportunity around the time of Napster, when the music biz could have invested in digital sales. The market was there, the "competition" (apart from being completely illegal) was relatively weak both in depth of catalogue and quality of material. All they had to do was make the leap - customers and their mindset would have gone with them; instead they wasted years trying to stuff the genie back in to its bottle. Even now, after years of widespread illegal filesharing, people have shown a tremendous appetite for paid downloads.
I know - all very easy for me to say in hindsight, and I'm definitely not trying to imply it would have been an easy opportunity to spot at the time. I know for a fact I wouldn't have been bright enough to spot it, but then I wasn't a music biz exec getting paid megabucks to do just that. The simple fact is they were caught napping and to say their response was inadequate would be a massive understatement.
Oh, and after all that it turns out Rapidshit is actually named in the suit anyway!