I think this is a bad move on Apple's part.
While I really, really like the photo iPod, and am not even opposed to that fugly U2 iPod, I think Apple is missing the point by failing to have a sub-$200 price point in the iPod line-up.
The iPod has helped popularize the MP3 player market, to the point where this will be the biggest holiday season yet for this blossoming market. There are lots of folks who can't afford $300 or even $250 for an iPod or a mini, but they will get some digital player for Christmas this year, even if it is an el cheapo $79 512MB player. If it uses a different DRM and isn't compatible with iTMS, then these folks are building a collection of music that they cannot port over to an iPod when they decide they can afford it. Given a choice later of either abandoning/re-purchasing $$ worth of music to buy an iPod, or of going with another product/vendor, guess what the vast majority will choose? Apple is just being short-sighted here. Maybe they plan on introducing one as soon as they know they have the capability to meet demand (a novel concept for Apple lately), but missing this holiday season is not something Apple can un-do down the road. Every consumer who starts their library without iTMS compatibility is one more nail in the coffin precluding Apple from becoming a long term player in this market.
Sacrifice a little margin now, Steve. The brand couldn't be hotter. You can still charge a smallish premium over the competition because of that brand. Get the technology into as many hands as possible now, and lock people in to iTMS!
Where's my damn $179 2GB purple flash iPod mini???