My thoughts:
Free previews, could be at 64kbps (average), in AAC (Mpeg), Ogg Vorbis (Xiph), Mp3 (Thompson). It is important that they know what "lossy" as in lossy compresion means. It is NOT cd quality, it is more akin to a tape copy. (With mp2 you could even claim it is

)
Pay per content should be Lossless if quality is a must. MPC standard at the very least, this format only needs a little research with possible patent issues, but you can't get a better quality/filesize ratio with others. It also seems very light(fast) for encoding and decoding, i'm sure a hardware implementation won't need to be as complex as with the other formats, consider it has more things in common with mp2. Second alternative would be with AAC, now with Apple backing, it seems the perfect candidate (specially if you need to get out of Microsoft chains), but current encoders are in evolving state, which can be good or bad, not sure of their point of view. Something finished NOW, would of course be MPC. Ogg Vorbis is excellent in the patent arena, its encoder is also in an evolving state. A backing from some important group could be just what Xiph needs. In the last we have the widely accepted Mp3 format, you only need to deal with Thompson, and then use lame APS (or lame APS -Y) and be just fine with it and enjoy current hardware support and a highly tuned encoder.
No matter which format is choosen, means for playing will come. People say things like "no hardware support", but content must come FIRST for hardware manufacturers to notice what their posible client demand will be. In 1996, there were no hardware mp3 players, yet people were encoding and decoding mp3 files. This could also means an added business oportunity, if they choose a format currently without hardware support, they could push a player for it

Choosing AAC/MP3/etc means paying royalties to someone else, those could be invested in a new player using a royalty free alternative.
For online models, 1$ per song sounds to me unreasonable. Its the same cost of a song per CD, but without CD quality, without printed art, without physical media, no shipping costs, etc... Something in the order of CENTS (say 25c) per song sounds better. I don't know if a 30minute song should apply too, or what to do with classical music?

Also think that a low price is the best method to discourage the so called "piracy".
But please, unless there is already a very good deal (and even if there is), avoid Microsoft like the plague. You only need to study their business model history. First, its all free and good looking, then later they restrict things and impose their own rules, then you either belong to them or get out of business. They really believe in the drug dealer method. Just study their past, they are not worth considering. And BTW, their format really sucks in terms of quality, you have already seen posts of people claiming 355kbps file being similar in quality to 160kbps of other formats, that should give a clue... Also support in other platforms is just a grace we can enjoy today, who knows if later they decide against Apple or any non Windows (or even older windows!) platform?. Didn't you see what they just did with Internet Explorer?. No more standalone product, it is now part of the Windows OS, period. Goodbye Apple

Yes, they love to do that.
And last: "Copy protected" (corrupted) CDs with 48kbps wma audio files are not the way to earn respect...