Well of course it works better, but in the longrun they won't be able to beat the competition for long using that tactic. I'd rather them beat them by sheer superiority in their products.
If they allowed iPod into WMP they're saying "Yea we'll let iPod in the scene, but try out this [INSERT PORTABLE THING HERE], it totally rocks and allows you to use our products to the max!"
That's like saying iTunes runs better on OS X. Why bother buying the extra crap for a little bit of increased performance with a product? It wokrs fine on Windows, so why bother?
They're going to have to convince people to give up their $250-350 iPods for the new M$ media player if they want to do any damage to the iPod market. Internet Explorer was a bang because it was free. The XBox did so well because it came out around Christmas and the same time that the Gamecube / PS2 had just come out, and Halo totally pushed its sales to the limit early on.
The media player is coming out around Christmas iirc, but in my opinion they should start selling them earlier (ala XBox 360 in terms of number of units sold) around October/November. Hype them up, then produce them like crazy for Christmas sales.
And actually, yah, they can beat the competition using that vendor lockout strategy. It hasn't failed in the past before. Well, hasn't failed very often anyway.