iCloud definitely doesn't work for me. I don't want to pay for a data plan just to listen to music that I already paid for. And I want to have access to my music when I'm driving in the backroads and flying on a plane, wherever I am in the world.
At the very least, I hope they continue selling the current Classic, a price drop would help too.
I think there's a little confusion here between iCloud and the iTunes Match service.
With iTunes Match, your entire music library becomes available via the internet. You can still keep your library on your computer, but if you delete any tracks, they get a little icon next to them which allows you to re-download them (they still stay in your library, you can still add them to playlists, track play counts, etc.)
You can access your iTunes Match-enabled library on your iOS device via wifi, or if you enable the setting, via cellular. You can also access your iTunes Match-enabled library from your computer, if your main library is not present (eg. you're on a laptop, and your iTunes library is on an external drive that is not connected).
For example, before going away from your home library you could sync one set of music to your device, and then while you're away if you think of something you haven't synced, you can download it on the spot (either when you find a wifi connection or via cellular if you prefer).
This basically reduces the requirement to sync you *entire* library before leaving. Of course, there's nothing to stop you from doing so, if your device has enough storage, but at least you're not completely stuck if you didn't sync something particular.
Of course, if you don't have any wifi or cellular access (eg. flying on a plane) yes you are limited to what is locally stored on your device — so the requirement for as much storage as possible still remains for those who don't want to sync subsets of their library.
However, it's a tradeoff of convenience. Assuming you have a library that fits on an iPod Classic, you can carry your entire library with you but you cannot add anything to it (eg. buy a new song that you hear somewhere) unless you carry your computer along too. This is not the case for iTunes Match-capable devices (iPod touch, iPhone, iPad).
It's fairly likely that over the next few years 128GB and 256GB iPads and iPhones will be available.
Also, when the H.265 video format is released, it's likely you'll be able to store more audio in less space, so both storage and bandwidth requirements will be reduced.
With Apple's clear focus on future technologies, I'd be surprised if a 128GB iPod touch wasn't just around the corner, and along with it the retirement of the Classic.
On the bright side, you could always get a white one and install this app:
http://www.youtube.com/watch?v=UZ6JcVgIo98