You will only be 'completely destroyed' if you insist on keeping current business model. Sooner or later game developers will need to change.
I own a legitimate copy of DROD:Journey To Rooted Hold and it contains no copy protection. Actually it's open-source. But the last time I checked, DROD sells very well for an indie game. A sequel was released and multiple paid level packs were released (typically one per season). This is interesting because DROD demo not only has a fully functional level editor - it's open-source. Many user-made holds (level packs) are good, but few of them come close to the level of polish official level packs have. It appears people are willing to pay for that. Another thing Caravel is doing is providing another scarce good you can pay for - CaravelNET subscription. It provides access to many extras, like being able to spectate other players in realtime, submit highscores, donload best replays, and offers much more integrated experience in general. Additionally, while demo is fully functional in many ways, full version contains more visual styles allowing for more varied level generation with editor. (not to mention one LARGE polished level set)
It is. Particularly in the PC game arena the protections have vastly improved. As for the headaches you mention, I've never had them. But that's just me I guess.
Have you ever had a game that requires CD to be in drive while playing ? What happens if the disc gets scratched ? It's not like CD's are very durable...
How about Prey ? I bought it because i knew it was on DooM III engine (id games are written cross-platform and are famous for working well on Linux, even if there's no native port). Despite of having a legitimate copy, I had to download a crack because the game's copy protection was interfering with wine.
Another example: Fish Fillets 2 _demo_. It contains SecuSuck or something similar. Suffice to say the demo didn't work in wine, because copy protection made it complain about being run in a debugger. So what ? I obtained the _demo_ in a perfectly legit way, why does it care what do I use to play the game ?
(FF1 was initially commercial but was comercially unsuccessful and was released for free along with source code. It's a great puzzle game and you can download it here: http://fillets.sourceforge.net/ )