You can put songs not bought at iTunes, and not bought at another online music store, on an iPod and on iTunes now. But if you buy a copy-protected song from Napster, say, then there is no way to put it on an iPod, unless you burn it to a CD and re-rip it, or otherwise disable the existing protection. Because Napster uses its own protection on its songs. And Napster doesn't want you to use that solution, first, because it's a PITA, and second, because then the song is no longer protected, and you can share it with whomever you want.
What this software does is really more of a back-end feature. It lets Napster easily sell songs that can be converted into the Apple protection scheme, so that they can go on an iPod, but still are protected.
Dunno if it's a good or bad thing. I guess it's potentially bad for Apple's iTunes dominance. But good for consumers, as long as it works in a straightforward manner. And Apple doesn't suffer too much, because the iPod is what people want (including Napster), and that's Apple's cash cow.