I'll chime in on this one, not normally a chimer 🙂 - But I think you basically answered your own question if you think about it, because you're not the only one that remembers that. 😉
As well known as ITunes may be, I think the answer to why Napster may have a larger licensed market in the music industry is because of how well its name became as being a former illegal peer-to-peer network, being the first of its kind to be sued by the music industry in an explosive and well-monitored series of court proceedings - and therefore, in rectifying themselves came to agreement with a large majority of the incredibly long list of involved production companies (whom were in the suit) into legally selling their music, and got themselves a ton of license agreements. Basically the lawsuit, even tho the settlement went against them via a substantial request for monetary reimbursement - it left their foot in all of those companies doors worldwide when it came time to turnaround and legally sell their music and obtain the licensing.
That, in addition to the loyalist factor, they simply became a well-known name - discussed at every dinner table to office space - and it gave them quite an advantage as well from a martketing standpoint. Bad publicity is still, publicity. Free advertising. 😉
I think iTunes however, has got the hold of the portable music player market still. Somewhat how you'd call every portable tape or cd player a Walkman, a portable mp3/music player these days you call an iPod. And as much as others are pimping out their portable players, the iPod i believe is still what will eventually pull iTunes along as the leader in digital music stores. Which will in turn pull in more licensing, the more popular it becomes. Because what do you use for your iPod? iTunes.
Which is why it may be they dont want other players to work w/iTunes. Don't want to break up that marriage. Dominate the portable market w/iPod, iTunes will follow right behind.
Now, what both companies need to worry about are technical issues and application errors and rights protection issues before it harms the market and starts a reverse effect.