To me, it has little to do with media size, but has to do with the need to have 128GB of media at your fingertips at all times. Anytime you have your phone with you are you using all your photos? Watching all your movies? Listening to all you music?
To each his own. To me, I don't need all my media with me at all time.
I absolutely need 128GB, or the opportunity to have hot swappable expandable storage, as I have with my Z10. You seem to use your iPhone almost exclusively for communication and there's nothing wrong with that. But most forget that the original point of the iPhone was to combine the iPod with hardware to receive email and make phone calls. The intent was still to have it serve as a media consumption device.
I have well over 25,000 individual tracks, with very little repetition (alts, live versions, etc), and to have even a moderate portion of that available, plus room for contacts, photos, videos, a film or two, 2 - 3 email accounts, on top of apps and their associated data requires
loads of storage, especially if you want any sort of room to grow over the 1 - 2 year lifespan of the device.
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And for those who think there is no need for ANYBODY to ever have 160GB or more on their media device (which Steve Jobs himself apparantly believed we needed 5 years ago, even WITHOUT apps and the O/S taking up much space), then well, ugh...
I think this might be the whole point. They might be afraid that a high-capacity iPhone would further cannibalize the iPod line. iPod still represents something like 70% of the music player market, and that kind of statistic is something that looks quite good in a QR. Plus, they probably hope that media hounds like myself and others will bite the bullet and shell out another $400 for a dedicated music device.