Stop Illegal Downloading -- Sell t-shirts

I've been thinking that record labels are really taking it on the chin because of the next generation and their ubiquitous tool -- the Internet. How do you stop illegal downloading? Is it even worth stopping it? Better yet, how do the record labels get in on this revolution instead of being on the outside looking in. One thing that hasn't become virtual (yet) is merchandise. To my knowledge no one has invented a virtual t-shirt. Notice I am being careful to say -- yet. Well, it's not likely. This is my way of asking -- doesn't the record industry have the next generation by their -- computers and mobile phones -- if they become better merchandising rather than better litigators? It makes sense, but sense doesn't seem to appear in a lot of the music businesses' strategy these days. You can't blame them. Their copyrighted material is being compromised. Their used to defining the terms (i.e., we've got new technology here on a CD, now go out and replace your vinyl while we get rich again on our catalog which is costing us nothing). I really believe record labels must transform themselves into major mass marketers not just CD pressers who happen to sell t-shirts and caps. I'm not sure the present brain trust gets this, but the next generation will because until a virtual t-shirt is the norm, it seems the record labels will have their customers by the -- shall we say, the neck.