Your 2) is fair use. Copying from CD that I own to a thumb drive that I own is fair use and does not entitle the original rights holder to additional royalties.

Your 2) is fair use. Copying from CD that I own to a thumb drive that I own is fair use and does not entitle the original rights holder to additional royalties. I'm also a firm believer in protections against commercial infringement. When I share a song with a friend, that's not an infringement that a court would particularly care about (and probably nor should the rights holder.) However, distributing many hundreds of copies on thumb drives should necessitate the compulsory fee. Still, you have to prove it in court...