This is just the age old discussion of whether it's better to capitulate in small ways so you can steer a group away from bad behavior/decisions later or to make a stand on principle to draw attention to the current bad decisions.

As much as some people like to say one is better than the other, I think the answer is always "it depends". Unfortunately, it depends not only on the relative power and momentum behind the current problem when deciding, but also on unknowns such as what will happen in the future.

It's hard for me to find too much fault in them deciding that they would rather stay somewhat relevant to the process than become obviously irrelevant (if that was indeed the thought process), as there's still a lot they can affect in the future. Armchair quarterbacking about what they should have done isn't too useful in my eyes.

Except that there was no such trade off here. If they refuse to approve DRM and then some browsers unwisely implement it anyway, having their approval makes it worse, not better. The browsers doing the wrong thing can claim to be following a standard, even though the standard is useless garbage because the entire point of having a standard is so that anyone can implement it, which in this case they still can't.

The trade off is in relevancy. If the standards body doesn't force a confrontation it knows it can't win, then it retains some power that it can throw behind or against future proposals. If the major browsers have already decided to completely ignore them and create their own consensus, there's that much less reason to listen to them next time. Not only has a precedent been set, but coordination on features outside the control may have already been somewhat standardized behind the scenes (beyond what they already do), making it easier next time.

The downside is as you say that the browsers can point to the standard as for why they implemented it, but that's why it's a trade off, and not cut and dry (IMO)

In some sense everything is always a trade off. But some things cost more than they're worth.

You seem to be mistaking the fact that the W3C for Web Standards is just the browsers. The last time it wasn't, the browsers formed WHATWG and the W3C became irrelevant.