iTunes is a program you run on your computer, which organises your music (to listen to it on your computer), as well as handling the iPod itself. You plug your iPod in, and music that's set up in iTunes gets copied to it.
iTunes also has a "music store", which is where you can purchase music. Most legal music that can be bought online (as a download I mean), is wrapped with something called DRM (Digital Rights Management). Essentially, if they just gave you the music to download and listen to, you could share it illegally with your friends, on or off the internet. The music industry don't want you doing this, so force DRM to be used. This prevents you from doing things with your music.
I, and many others, dislike this immensely. This is because it takes away your personal freedoms. If you've bought this music, its stands to reason that you should be able to do what you want with it (short of doing anything illegal with it of course). Even with CDs, it's illegal to share it with a friend. It's just that there's no protection, so everyone does it.
With DRM, it prevents you from doing things you should be able to do with your purchased music. For example, with a CD you can put it on your iPod, or any other music player you want. You've bought it, so can listen to it as you like.
With most legally downloaded music, you're restricted with what you can do with it. For example, music bought on the iTunes music store can only be played on iPods. If in a year or two you're bored of iPod and get another player, or just get something new, then you will lose all your music. Even though you purchased it completely legally, you're lose it all. The music you bought is only for iPods.
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