At the moment I'm using physical copies to promote what I do, and I usually point people to my reverbnation/myspace profile if they want to listen/download or whatever.
IMO, the physical CD will never die because I know there are others like me that like a tangible product when they make a purchase.
If you're considering what to do, hit up CD Baby and sign up, and make sure you opt-in for Digi Distro. $35, i think, and you get physical sales on their site and digi distro at iTunes, eMusic and several other popular places. And you always have direct-from-artist physical sales too (myspace, shows, trunk, etc).
Like B said, people like to hold a product.
The industry itself, a different story.
Single songs = lesser $ in recording budgets = lesser production cost = lesser manufacturing costs = larger profit margin.
The reason behind the fact that a service is cheaper than this is that the companies order their blank CDs in bulk. Because they save a lot of money, they pass on these savings to the customer.