¤%& you!

The cost of initial production is fixed once it is produced. Because of this, the cost can be distributed across millions of copies. The end result being that that cost becomes microscopic.

As well, I very much doubt that the initial cost of production exceeds that of distribution for CDs. Your comparison between CDs "that cost pennies" and bandwidth "that costs a penny" is fundamentally flawed. The ratio differs greatly. The reality is that the bandwidth for a given song is much, much less than a penny in cost.

It can be difficult to directly compare, but I will attempt to do so. If we work with a 1 megabit/sec connection, downloading continuously at capacity for one month. We'll assume a 30 day month. That gives us 2.592*10^6 seconds. That gives us megabits. Divide by 8 to get MB... Or, roughly 324 GB in one month. If we go with $40 for said month of internet access, that gives ~12.3 cents per gigabyte. Let us be generous, and say our CD holds 100MB of music data. So $.123 * .1GB is ~1.2 cents. That cost replaces the cost to press the disks, produce packaging, ship the disks, employ personal to handle and sell them, etc.

It's very possible there are errors in my estimate, and the assumptions(which may or may not be valid) are outlined above. The increase in efficiency, and the decrease in production cost is staggering.

As for your assertion that the cost of producing the music exceeds that of production and distribution of the physical media, I will require that you cite a reference for that one. I do not believe it to be correct.