This Rolling Stone article about the changing standards for sound on music CDs is interesting to me -- it's not the first time I've seen a major publication decry the overuse of dynamic range compression. Where RS really loses the plot, I think, is when they blame the rise of MP3s for the trend. As the article itself notes, the overuse of DRC really began in the mid-90s, before MP3s had really begun to take off, and well before they'd set the new standard.
As for the present day, clearly there's no need for digital music to impede sound quality. Portable hard drives are big enough, and better free sound standards exist to store data at lossless rates (see FLAC.) The only real problems here are that a) the industry (primarily Apple) is moving away from cheaper, larger hard drives to smaller, more expensive flash drives (not without good reasons), and b) so far, there's been little move from the consumer end to shift to lossless formats.
The big question -- and this has a wider relevance, I think -- is whether we'll ever be able to get consumers to switch from MP3, which though flawed is basically good enough. The RS article mentions the failure of DVD Audio and SACD, two attempts to bring in higher-fidelity audio that resulted in embarassing losses. (SACD and DVD-A seem to have found a niche in classical music, though.) What it doesn't mention is that both formats adopted restrictive copy-protection measures that would have prevented people from using their music the way they clearly wanted to. But I think the biggest hurdle is simple complacency: people know MP3, it's good enough (and certainly good enough for listening in noisy environments like the ones we use iPods in) and most people don't have the kinds of sound systems they'd notice the difference in anyway.
This, to me, suggests that the transition to HD-DVD or Blu-ray is going to be a lot rockier than Hollywood is hoping.