From what I’ve picked up here and elsewhere over the years, I’d say it may be true for Highland piping in the States, as opposed to Highland piping in the Highlands.
Ah, so it is not as regimental in Scotland? I am in Canada, which has much Scottish roots (which I do) so I think that our piping system may be similar to Scotland’s then. Then again we have the very competitive SFU pipe band! 
With regard to the stuff about Highland piping, I think it’s easy to oversimplify points of view about it from one perspective or the other. The competition system, put in place starting in the 1780s with the intent of preserving the tradition, has in fact been enormously “innovative” in the sense that notions of “correct” style, tempo, gracenoting, and pitch (both of individual notes within the scale and overall pitch of the instrument) have radically changed at relatively frequent intervals. The critique that modern-day conventional Highland piping has placed technique before musicality is often a valid one, and if you’re playing in a high-stakes Grade 1 or Open Professional-level competition, if you so much as miss or change one gracenote on the printed page, then you’re likely to be toast. Particularly in the field of pìobaireachd playing, there is much ridiculously iconoclastic BS about what is judged to be the “correct” take on the phrasing of a tune. I can remember going to a lecture by Allan MacDonald in 1998 where he talked about his frustration as young competition player when after playing a pìobaireachd, someone would take him aside and say to him, " Now, sonny boy, that F in the third bar–you’re not holding it long enough," or something to that effect. “Would I go up to Paddy Keenan or Liam O’Flynn or any of the great pipers of Ireland and say, ‘Oh, by the way, that F in the third bar of ‘Mná na hÉireann’–you’re holding that note too long.’ Would I dare?!” he said with palpable exasperation. The methods of teaching piping with the intent of developing successful competitive players had, to some, increasingly bred generations of able players who were more copyists than artists.
I was an OK competitor at one time, but I never really enjoyed it, and didn’t feel like investing the time and effort to play in what I considered at the time to be an extremely straitjacketed way. After I started playing uilleann pipes, I hardly played my Scottish pipes at all for about ten years. Finally, after a few abortive attempts to get back into playing, I’m back at playing them again pretty regularly, and I think the intense listening that I did for so many years with uilleann piping has had some effect on how I listen to Highland piping. I’m suddenly realizing that 2/4 competition marches that I previously dismissed as boring have bucketloads of music in them. Even with the strict adherence to what’s on the printed page, there is a good deal of artistry and musicality that can be expressed in such tunes by following the old Scottish piping maxim of “keep the long notes long and the short notes short.” Some composers and arrangers were pretty arbitrary about how they used gracenotes in Scottish pipe tunes, while others were very thoughtful about them. If you look at Allan MacDonald’s compositions and arrangements, the gracenotes on the page frequently have a crucial effect on the rhythmic accent of the tune, although when you actually listen to him or his brothers play them, they frequently vary the gracenotes and to a lesser extent the melodic line much in the same way that any good Irish musician would. The result is presenting a tune with different qualities of light and shade, much like different exposures of the same photograph, rather than one strict interpretation. Certainly, outside of the competitions themselves, artistic awareness and individual taste and style have been creeping back into Scottish piping in a generally positive and refreshing way. I’d say that’s generally true among good players all over the world–not just in Scotland. However, I’m of the opinion much more now than in the past that this growth in artistry is grounded in many grueling hours of woodshedding on technique rather than the other way around. I would say that is mostly true with uilleann piping as well, but with the clarification that due to the nature of the playing technique and some of the tunes themselves, it is easier to play musically without necessitating a whole kitchen sink of technique. Many a lovely tune has been spoiled by overdoing it.
As for playing by ear in general, for Irish music, it is indisputably crucial. If you ever walk into a “session” where the musicians have music stands, walk the other way fast. Some people take to it more easily than others. I took Suzuki piano when I was a kid for about four years and then switched to a non-Suzuki teacher. I thought I had learned to read music in Suzuki, but when I went to a different teacher, I quickly realized that what I had actually been doing was mostly picking up the music by listening and watching what my teacher was doing. While I regretted this at the time, I’d like to think that perhaps all that ear training at an early age helped me pick up tunes faster when I started learning Irish music. Generally when I “learn” a new tune these days, I just listen to it over and over until I find myself whistling or humming it in the kitchen or absentmindedly fingering the notes on the steering wheel. Then I just pick up my pipes and work out how to play it. I don’t use computer tools to slow tunes down, though I’m sure this would be helpful and productive for certain tunes. The danger for Irish musicians of any level, though, is to pick up tunes way too fast and never quite internalize them enough to really know them well. Certainly, in any session, the vast number of tunes played means that often some of the musicians will be playing along on tunes that they only half know or half remember. Pipers and box players are at an extreme disadvantage in this regard because when we screw up or forget how the turn in the second part goes, it often sticks out much more than it would for a fiddle or flute player who can more easily duck out or hide behind people who know the tune better. After spending many years trying to voraciously learn new tunes, I find that I spend a lot more of my practice time now going over tunes that I previously thought I knew and getting more familiar with them. For the beginning or intermediate player, when learning tunes by ear, it is far preferable to know 10 tunes extremely well than to sort of know 50 tunes.
For learning out of something like the Clarke book, I think the music is pretty crucial early on, but that after a while, once you start to get some of the basics down and start learning actual tunes, you can switch to focusing on learning the tunes off the CD and using the printed music more for reference.
I agree with you on a lot of what you said! And I’m glad that the GHB are getting a refreshing dose of different techniques and styles.
If you listen to old players such as Willie Ross, Seumas Macniell, James Blair Robertson, etc…, on sites like “old players on 78”, or “Ross Music Page” you can hear quite a bit of variation on many of those tunes. It really is quite fascinating and musical to listen to. I always think, if I want to hear good players techniques, I will listen to players like Chris Armstrong, or watch a Pipng Live! Video. But if I want to listen to the music, I will listen to players like William Ross, James Blair Robertson, or John D Burgess.
A couple months back there was a big discussion in the BobDunsire forums on why you should get an instructor, and I remember one person saying something that goes along the lines of: If you are learning the (Highland) Bagpipes and want to play ( can’t find the thread, so I don’t remember what he has said here) PLEASE choose another instrument… So I did what he said, I chose another instrument. The uilleann pipes… I thought that the GHB was the instrument for me, until I came across a video of Seamus Ennis playing The Bucks of Oranmore, at first it didn’t sound like he was playing anything, until I gave it quite a few listens, and that was when I fell inlove with the Uilleann pipes! 
I did lean the violin with the Suzuki method, and I think the teacher thought that I was reading the music, when I (like you did) was actually listening to him. But when he found out, he told me how important it is for me that I should read music. I could sort of read the music, but I could never read out of the bars, so I just gave up on the violin. I just think when I got in to instruction with the highland bagpipes, or in a pipe band, I just find that with someone like me, it will just take the enjoyment away from me… (I still enjoy them however, it’s just that a person like me will just get his feeling hurt nonstop, from all of the criticisms that I may get.)
Go to the Greenway session in Tigard, they have the sheet music going there. Something for everyone in PDX, there’s the Co Cork which is mostly Dan’s students, sessions where you have to be pretty proficient technically like the Caldera or Ruddy Mudder, the Moon and Sixpence where you have to know the secret handshake to play, etc. 
M&S is invite-only, see. Then there’s Kell’s, where the players and attendant ability are totally random.
Went to my first beginner’s session after only playing for a couple months. Admittedly I not only completely sucked then, played a mile a minute, had a flat F#…but good times, good times. You don’t have to blow the doors off everyone necessarily, either. Someone wrote an editorial about that a while back, pipers were trying to attain the lofty heights of Paddy Keenan type ability, they should really focus on just playing in a simple manageable style. It all depends on much innate ability you have, and how much time you have to invest in learning, too.
You can always just go to sessions with the good ol’ tin whistle too, or “Irish piper’s practice chanter” as a GHB/UPper termed it for me when I was just starting.
Some people, to me anyway, have really strange approaches to learning - I know a few concertina players around here who only learn new tunes when Noel Hill comes to town to teach them. What is that, $50 an eighth note? 
There is always this balancing between freedom and structure in playing music. I’ve been learning to play (whatever instruments I played since I was a child) mostly by ear and experiments. However at some point I felt the need to develop a backbone to my playing. That’s when moderate amounts music theory came in 
I’d say find the middle path.
Every so often I run into a classical musician who has made a go of crossing over to playing Irish traditional music (that was me too, 30-some years ago), mostly at sessions. It is not unusual to hear their frustration at being strongly encouraged to leave the sheet music at home. I often try to explain why it is good to ear train/memorize tunes and how, stopping and turning a page in a tune set in a session is really not a very good pursuit. They are usually pretty intransigent about it. I get the attitude from them that they feel that they are coming from a better, official music background and therefore the sheet music.
FWIW I keep a book of piping tunes…THE book of piping tunes (Seattle club’s pipe-friendly book) around as a “jogger”. Comes in handy for starting tunes you can’t quite remember how to get started.
Tommy - there’s a great freeware program, Easy ABC, you can generate a file of “incipits,” i.e., the first couple bars of all your tunes. Or the first 4 bars, or whatever you feel like. Think I’ll fire one up today matter of fact as I finally have my new printer up and running.
The best thing one can do for developing the ear is to listen. Listen to recordings of tunes you want to learn over and over, until you can hum the tune and hear it in your head. That is how you learned “Happy Birthday” as a kid. Listen to ITM twice as much time as you spend practicing. Once you have a tune firmly in your head, it can come out of your fingers, with practice. Listening repeatedly is key. Hum tunes or listen to your inner CD player when you are doing other tasks. Listening to “inner” tunes is a form of practice. It can be done anywhere or anytime and it won’t disturb another soul.
Sometines I “Phantom Play”, where I move my fingers to the tunes that I am listening to.