We knew they were coming
Twitter have said on more than one occasion that the client application was not the business to be in - the writing was on the wall.
There is no entitlement
With a free service and a free API there is no entitlement for anyone to make money by building a business on top of Twitter, especially in an area they have been advised not to.
It need not be the death of third-party clients
Yes, it looks like 3rd party clients are going to have a hard time but if they follow the display requirements and consult with Twitter soon enough they may be lucky. Twitter's own app will, no doubt, gain more functionality and the company will want 3rd party apps to become more like it (remove some of the "extra features" like muting) but developers can ask permission for more user tokens above the 100,000 limit (or 200% of current user tokens). Twitter will probably give a whole bunch of conditions (and we will have to wait for the first test case) but will need to provide meaningful reasons why a developer may not be granted extra tokens for a popular client that meets all of Twitter's requirements.
It's all about "eyes on" and taking control
Arguments have been thrown back and forth about billion dollar advertising revenues and if an open API can generate more money but it's not just about that. The required money will come but twitter needs to control its ecosystem as it pushes more towards a media, information and discovery network.
Twitter is about the users and the conversation
What does it really matter what client you use? The same conversations can be had with the same people and, as the display requirements are no longer guidelines, clients are going to start to look a lot more like each other in due course. Are people really going to abandon their social graphs just because they can't use a particular client or feature?
Is this all just a storm in a teacup?
Image by Dubber.