It's not Win Mobile 7 but apparently WinCE based. That's a great advert to Microsoft's partners in WinMobile. As for DRM - their big US marketing thing is the Zune Pass vs the thousands of dollars you'd need to spend to get the same tracks from iTMS. Given the nature of the Zune Pass it almost certainly needs DRM.
(And while I have no interest in a subscription system, as I already own more music already than I am likely to buy going forward, I can see it's appeal for teens).
I also have a suspicion that the audio quality on the iPod has probably fallen as the price has fallen - good analog components don't fall in price at the same rate as digital ones, and of course there is a continual pressure to reduce prices.
Think back to the CD market - people were sold on the idea of perfect sound forever - then bought the cheapest nastiest stereos that they could.
I'm still amused that commenters on the Register still think that drag'n'drop file management / using your audio player as a mass storage device is something anyone really cares about. Most people just use a memory stick for file transfer, and evidently prefer the managed library approach (i.e. the further they can get away from a file system the better).