The short version is that it's because of regulations from the government and the acceptance by the traditional music industry. It's created a flawed system. That is combined with the fact that—forgive me—the product isn't being sold at the right price point. I'm sorry, but $10 a month for 35 million songs...? Most people don't want 35 million songs, and it's too low a price.
Is that bad for consumers? Maybe it is for those who want to pay less money to have access to music, but you can't squeeze blood from a rock. If you want to have more money, you need to charge the appropriate price for the product.
Everybody wins then. They'll be profitable and the artists will make more money. Sure, you'll have a smaller consumer base utilizing the service, but so what?