It took me a while to track this rumor down, but the team just sent me an update/correction. Here’s more from Wayne Hickey, who is doing PR for the Windows Media Team.
“It is absolutely untrue. Microsoft provided the technology for this deal only, and in no way placed restrictions on design or the use of other audio technologies as part of the deal. Verizon intended to support direct MP3 playback at launch, but their primary focus was over the air delivery and one of their other tech providers was unable to do direct MP3 playback by launch. They do support MP3 playback via transcoding to WMA via Windows Media 10 and are working to deliver direct MP3 playback shortly.”