This will not replace our current 'music' iPod
Keep in mind that Apple probably realizes that the current 'music' iPod can't evolve into a 'video' iPod without giving up so much that we love with it now. They realize that if they are going to make a true video iPod the ergonomics will have to change. The screen will have to be bigger. The device will have to be bigger. It will have to be heavier (mostly for strong battery).
When they realized that this new video device can't replac the current iPod because of the compromises that it required, they began to rethink the whole device. But when they did this, they also began to think "What else can this little bugger do?".
There have been so many rumors about the added functionality of this device and I believe that Apple has played around with them all, getting rid of many and keeping only a few. They are finally locked down on its new features and are working (or hopefully already done) on the new way to interact with this device. I have little doubt that the interface, once we see it, will be that same old "Why didn't we think of this before" kind of thing. The question I keep asking myself is what the NEW features will be. I don't think it will be just video.
Some new features I would like are: Wireless for Internet access (either WiFi for cellular), clean way for inputting text (for Calendar, e-mail, web surfing, etc.), eBook reading (possible new category for the iTunes Store with both purchase and subscription), and if they can get the device small enough a phone.
I think that Steve gave us hints with this when he said recently that he was as proud of the products that they didn't release as the ones that they have. I think that they had tried to make an upgraded Video iPod to replace the current line but ultimately came to the conclusion that the changes they were trying to make spoiled what we like about it in the first place. It was then decided that this Video iPod was going to be a new category.
So don't worry about loosing the wheel, or the compactness of your iPod. It's not going away. This isn't the device we are talking about.