Digital music in the UK was already more expensive than the US before charging a 20p premium. I agree, I can't see the price being dropped anytime soon. If speculation of Universal to go DRM free with iTunes is to be believed, that will make two of the big four record labels DRM free, causing the others to follow suit?
The launch of Amazon's DRM free download service should add competition to iTunes, which if it becomes popular should cause Apple to reduce the premium charge to compete. Amazon has the advantage of using MP3, a much more universal format, compared to iTunes use of AAC, which isn't playable on as many media players.
Watermarking tracks is Apple's safety net. This way, customers will be able to use the media how they want to, but they still have the possibility to trace anyone who shares the media. I see the point though, that the media could be changed (possibly?) to incorporate the details of someone else. Almost like a new level of credit card fraud online.