Hmmm, 32GB iPhone means 64GB iPod Touch, which means I'm finally upgrading my gen 1.
If Apple can knock a hundred dollars of the price of the 8GB, to put it at $99, and ATT can shave 20 bucks off of the combine data/service rates for reduced data/minutes, I think that'd definitely push sales for the base unit.
For people who don't have huge music libraries, don't endlessly surf the web, or use their phones for movies and games, such a device would represent a good sweet spot I think. Just enough web access to check emails, traffic status, weather, stocks, and the occasional GPS map would be all most people need on a day to day basis.