This is either BS or negotiation posturing. We've heard the threats before, and seen them cave too.
Bottom line is record labels that are not on iTunes are going to be a little less relevant. Maybe B&M stores sell more CDs than iTunes sells digital albums and singles, but I can guarantee you a lot of people become aware of new bands and albums on iTunes and then go buy them at BestBuy, etc. Record labels don't really make a whole lot of $ off of iTunes. What they do get though is a lot of free advertising and marketing for their product.