I admit that the iPod doesnt have the best audio quality but not many people are just after a device that only does one thing, personally id rather have music, hd video capture and playback, internet browser, high resolutoin screen as well as apps and games.
That's the job of the all-in-one, jack of all trades, smart phone.
Fiar enough though, if that's what people want then it's their choice and money. I personally don't see the logic behind many of iPods other than the 160gb classic, which I was close to buying myself purely as I miss owning a high capicity player.