Quite a challenge to create such a system, but not impossible.
Definitely right. It's actually very possible. And it doesn't have to be just for music. Single instance storage is nothing new. Plenty of systems exist that check for similarities between files so that only the differences are stored.
Cablevision got sued for this a few years ago because they wanted to record TV shows on their servers and then serving them to their DVR customers. The broadcasters stepped in and said that it was copyright infringement because they were re-broadcasting a single recording to multiple users and thus was not fair use.
So, Cablevision revised their system so that there was technically a unique recording for each one of their customers, but they only had to store a single copy on their end. My guess is that they didn't actually do anything technically except maybe add an ID number, but apparently it was enough to win in court.
http://arstechnica.com/tech-policy/...e-dvr-stays-legal-supremes-wont-hear-case.ars