[Will]

Just some quick comments:

You got things backwards with iPod and iTunes. The iPod will work with any AAC (with or without DRM), MP3, WAV, or Apple Lossless audio file. So, any source which you can get those files, will get you music for iPod. So, iPod will work with other services as long as you can get one of those formats. The iTunes Music Store, however, has only DRM'd AAC audio files, which will only work with iPods unless you break the DRM. So, you have it backwards; iPods can work with lots of different sources, iTunes works only with iPods (unless you circumvent the DRM in some way... like, say, burning a CD then ripping the music back off in another format).

Independant labels actually DO charge less for CDs. Maybe you're just looking at the wrong ones, but I get sub-10$ CDs from independant labels fairly often. You almost never see that from one of the major labels, and when you do, it's when they're trying to dump excess stock. The standard price range for a new release is between 16$ and 20$ for a major label, and it usually drops to around 12$ to 16$ after it's been out for a while.

Songs ARE (marginally) cheaper from downloading on iTunes compared to getting the actual CD. Quick check on prices: new Foo Fighters CD (19.98 list, 17.99 iTunes, 14.99+shipping Amazon), new Gorillaz CD (19.98 list, 12.99 iTunes, 13.29+shipping Amazon), Miles Davis' 'Kind of Blue' (11.98 list, 9.99 iTunes, 9.99+shipping Amazon), Postal Service CD (13.98 list, 9.90 iTunes, 11.99+shipping Amazon), Pink Floyd's 'The Wall' (34.98 list, 25.74 iTunes, 27.99 Amazon). There are a few titles from Amazon that would be cheaper, until you factor in the shipping, or buying enough stuff to get you free shipping.

And finally, the major labels do rip off a lot of the people they sign, mainly because they have a lot of lawyers who know how to make a 'favorable' contract, and the musicians often have little to no legal representation in the process. All the people who sign see is that there's a nice big bonus up front for signing. What they don't see are clauses in the contract that require payment for studio time (taken out of the bonus), pays tiny percentages of CD PROFITS, and locks the people in with that label for a certain amount of time, to prevent any dealings with other labels or attempts at an independant release. So, a contract might look like:
You get 500,000$ up front for signing. Congratulations, you're halfway to being a millionaire! Now, you need to record in this studio. That will be 30,000$ per hour, please. Three months later, you have spent 450,000$ on studio time, doing recording, mixing, and picking out the bits that sound the best. If you want to tour to promote the album, you have whatever is left of the 50,000$ not spent on living for three months. If there are 1,000 copies sold in stores, you get nothing, but the label will sell you a few copies of your own album so you can make a dollar or so for each one you sell personally. After a few months of this, you have none of the initial "bonus", you're lucky to get a few thousand in royalties unless you've hit it big, the money you get from ticket sales almost covers transportation and living costs, and the only thing that lets you have more money than you started with is what you get off selling merchindise. Then, at the end of the year, you have a nice big number for the IRS to look at and tax you on.

The difference with the smaller independant labels is, the musicians get a better cut of REVENUE (not profit), the studio costs are a lot smaller, and are usually in-house, and there are lots of other musicians to tour with to help offset the costs associated with that.