The record companies know that and it's in their interest to keep those competitors around and at least marginally healthy, if only to keep Apple on its toes. But it's a win-win for the labels right now: they sell tracks by the commercial freighter-load via iTunes, and those folks who will under no circumstances pay for DRM-encoded music will either buy CDs or go to one of iTunes's competitors. Either way, the labels get paid. They've got no incentive to hand over the keys to the kingdom. The problem is that the iTunes Store is just too successful--and why mess with success?
That leaves the issue of principle. Last year, Steve Jobs . I think that's true: Apple has a loyal enough base that people would continue to buy music from the iTunes Store, and in fact it might even help sales. It would certainly be good PR for the company, if nothing else. But don't think for a minute that Steve Jobs is losing any sleep over it. On his To-Do list, it's clearly under the "would be nice" category--right next to "make Greenpeace happy" and "turn Apple TV hobby into successful business model."
The only way Steve Jobs is going to convince the labels to drop DRM is by showing them that they're losing ground to piracy. At the moment, though, the iTunes Store is doing a blockbuster job of competing with file-sharing. Even that's going to be a hard sell for the old guard of record labels--remember, this is an industry that came up with the marvelous business strategy of suing their customers. They're going to find the argument of going DRM-free to combat piracy counter-intuitive at best.
Nothing would make me happier than to see iTunes throw off the shackles of Digital Rights Management, as I've written on a over the years. And while I think that the principle of dropping DRM appeals to Jobs, the Apple CEO has an overriding principle: do what's good for Apple when it's good for Apple. That time may be coming, but it isn't yet.