First, to the people who knock the shuffle: you couldn't be more wrong. It's an excellent product. I prefer mine to my wife's 10gb 1gen iPod, but I also prefer my sisters mini to my shuffle. (Although her first gen mini gets pretty crappy battery life, especially compared to my 12+ hour shuffle).
These little cube players are slick, but other than the little screen (the shuffle could surely use one of these) they've got nothing on the iPod. The form factor is all wrong, as mentioned. I keep my shuffle in my breast pocket all day at work, etc and no one notices, nor can I feel it in my pocket. The extra width of this thing would be very uncomfortable to me.
At a certain point it isn't about making something smaller than it is about keeping it the right size/shape to be usable. I'm hoping the rumors about Apple doing a 2gb shuffle with a small screen are true. I think a screenless 512 at about $80 new, a screenless 1gb at $100, a 1gb w/screen for $130 and a 2gb for $150 would all sell well, especially if they went to a 6/8gb mini model line (dropping the 4gb).