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You might want to Tversity, as it converts automatically to the correct format of your media device.

Everything is great, but i think allowing to download in .mp3 is illegal move.

This is a viable idea. What you can do is do what a lot of people are doing with blogs and forums. Instead of being a general site for everything, make it a niche site or even a micro-niche site. Then your resource requirements won't be that big and you can grow gradually.