I agree that that would have lost Apple some ground, but I think they'd still be vastly ahead of other people. The DRM doesn't stick people. The incredible branding does.
People think iPod sounds reliable, and MP3 player sounds unstable. They go for the iPod because they think it's the only one there is.
Without the DRM, we'd see a much more fragmented player market. iPods might still be the leaders, but they'd almost certainly have a lower market share.