How big of a concern is it that Bitcoin could build Counterparty-esque functionality directly into their protocol?
It's not possible. Bitcoin can't escrow value, which means that you can't build (decentralized) smart contracts directly onto it. That's the value of XCP. It can actually act as a value escrow.
Very interesting, thank you. Is any data stored in the Counterparty network or is everything stored on the Bitcoin blockchain?
EDIT: Is escrow critical in some, most, or all of Counterparty's functions?