You're both right actually. MS wanted to court a Japanese CE to get a better foothold there, and they also wanted their software and codecs running the show.
So they decided being the content gatekeeper is a much better way to do things, but I also think that iTunes is starting to teach some lessons in general
No one person of company should have they ability to deny competition, and while we wait for antitrust law to catch up with Apple, I don't think anyone wants a single solution owned by a single entity. That's why there's a universal "digital rights locker" in the process of development. All vendors will feed into that locker enabling content. MS is extremely jealous of iTunes, but they're not taking into account the same thing that Apple isn't: They don't own any content.
Steve Jobs isn't on the board of Disney as part of the Pixar deal for nothing, but thus far he's been less than successful pushing them to do iTunes exclusives, because I don't think they want to be wrapped up in that game at all
One thing I would like to see done in the interim: Digital copies are great, but the use-once disc is environmentally unsound, and annoying for the consumer because you can't re-access the content. Surely the ability to pay apple a quarter or whatever they're charging the studios as an authorization fee to re-rip the disc (only works for material already registered to your account) can't be that hard to do.
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