Artist should, ideally be rewarded by this service for giving away as much music as possible under free licenses.
Business Model Suggestion
I see a sort of three level marketplace solution as the answer. The site will be free to use, all music already on the site free to download. Users are also able to create a paid account, which does allows users to allocate funds in two ways: The general fund, and the donation fund. Money in the general fund is allocated automatically towards artists that the user likes (as measured by the frequency that they listen to them, or how many songs they have downloaded by the artist). The donation fund allows the user to give one click donations towards various things on the site: Individual artists, site maintenance, any e-knicknacks the artist puts on their homepage, etc.
Users who have contributed more than, say, 5$ towards the general fund, or have donated an equivalent amount in total to the various artists on the site are given access to premium digital content posted by artists. This can be blog content, special remixes of songs or component samples so users can remix songs themselves, anything where all it costs is bandwidth. This makes sense, as artists should not be giving away, for instance, special shirts just for band groupies to the world at large without a further filter.
The third level is a sort of priority access to the band itself, for which they would charge on their homepage. This area is where the band would run promotions in the physical world, priority concert seating, discounts on CDs, that sort of thing. Artists are, of course, free to set this charge at 0$, and such artists would have a special place on the site where they are recognized and promoted.
What about providing artists with tools for promoting free music?
For example: it's not hard for someone to upload tracks to a website and let users download them, but what about providing stats and analytics, an opportunity to run a tip jar, an opportunity to ask the user to sign up for a mailing list? Trent Reznor and NIN have developed a platform for delivering these sorts of downloads. It could be really useful for artists if they can get some stats about their downloads which might not be available from a site like MySpace, or which may be harder to implement on their own.