Good deal. That said, my opinion is that you're definitely doing right by your users. You're being open and honest about what's going on, and you're not holding their data hostage. I've never gone through this myself, but just remember that you can only do so much, and you can't please everyone.
If you've been running a good service this whole time (I'm betting you have), I'm sure that most of your happy customers will be willing to pay €0.99/mo.
Somewhat on topic: do your users who won't upgrade have a simple tool they can use to download all their albums?