There is also an interesting economic angle here. The question is, will MusicMatch (and others) actually make any money?
Remember, after royalties (which are 70% of revenue), bandwidth/server costs, credit card transaction fees (these have to be big, for 99 cent purchases), and development/support costs, iTMS does not actually make much money at all. Steve admitted as much a few weeks ago, and conceded that its main function is to sell more iPods.
It's unclear why the math should be any different for MusicMatch, with the key exception that they do not get any revenue from selling portable music players. To put it another way, Apple could probably afford to lower prices to 89 cents/track if it wanted to. It might make a nominal loss on the iTMS, but that would be more than compensated for if it could attract more ppl to the service, which would sell more iPods. In contrast, if MusicMatch lowered prices to 89 cents/track, they would also be making a loss, but they wouldn't be selling any music players. They might attract more users, but that would actually be a bad thing, as it would simply increase their total losses!
It may turn out that this type of service is only profitable when offered by a company that also produces a compatible music player. However, even then there is a key difference. If Apple is the only major AAC service, then they know that people using iTMS are buying iPods (by far the most popular AAC player...well, it's the most popular portable music player period). If I am Creative Labs, and I offer music in WMA format, which is also what all the other crappy Windows MP3 players are supporting, then there is no guarantee that the people downloading my music are actually buying Creative players (as opposed to the myriad of other WMA players). But if I tweak the music format so that it only plays on Creative players, then I've locked out most of the market, and few people will want to use my service. Of course, the same is true of iTMS music only being able to play music on iPods, but we don't consider that a "restriction" because the iPod is the most popular player anyway. So having big marketshare in the portable player market may turn out to be pretty key.
Anyway, it will be interesting to see how this all plays out. For the moment, I think it is in Apple's advantage that they are the only big company, both on the store side and player side, fully supporting AAC (ironic, given that it is an actual standard, as opposed to WMA, which is entirely proprietary).