There are many srtists who make music which is not ever going to make anything more than gas money from touring (and not because it's bad or unpopular).
Anything in the realm of ambient-indie: Windy & Carl, Labradford, Christmas Decorations, etc. etc. I'm pretty sure almost none of those bands even bother touring.
Anything that is difficult to reproduce live without just using a bunch of pre-recorded tracks - M83, for example.
And merch? Really? Pretty much everyone I know stopped buying band t-shirts once they hit 22 or so, unless it's a very special band or very special occasion (or very special shirt).
I know many musicians who make a good amount of scratch from selling CDs, either through small indie labels or their own Myspace/website.
As far as the whole "If I could buy more music, I would, but I'm poor so I steal it" argument: That's generally valid, because I'm sometimes guilty of it myself, but again I'll refer you to before the days of high-speed Internet, Napster and everyone having a CD-burner: I was poor back then. Exceedingly poor. This forced me to make choices about the albums I bought, which in turn made those albums exponentially more special to me, and I'd argue that it made me appreciate the music more because, with a limited influx of music into your life, you listen to, analyze and think about what you have, instead of having thousands of songs and hundreds of albums you listened to once and didn't ever re-visit.
The first time I listened to In the Aeroplane Over the Sea, I absolutely despised it. If I had downloaded it for free I'd have deleted it and likely would have been deprived of eventually appreciating one of the ten best albums of the entire 1990s.