The sound quality of the audio format(s) used by the iPods are as good as any other digital music format. iPods support several standard audio formats for both lossless and lossy audio recording. How the music is encoded (bit rates, format choices) will impact both the file size and audio quality.
The music you purchase online is a compromise of reasonable quality for reasonable download times. This is similar to the compromise that digital music on a CD represents. Some people (me a long, long time ago) can actually hear the distortion introduced by the standard CD sampling rate - not as a tone but as a "harshness" in the sound. Today I can probably tell the difference between a CD and a downloaded MP3 on a good day, if I'm lucky.
As far as DRM goes - apple had/has about the least restrictive DRM setup out there. Buy the music, create a playlist, burn to CD, read back into the computer in the format of your choice. Not great but at least you can burn the CD.
I'll take my old turntable any day but it just won't fit in my pocket

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- Eric