Huge prism? Canon has been building `full frame' cameras (analog slrs) for years, including some with very advanced AF systems.
Right, but the 5D was the first one since the EOS1v to not be a huge monster, and the first non-1series FF since the EOS 3. Compare the size of the viewfinder bulge on any 1-series FF (film or digital) with the 5DII. The 5D has a much lower bulge as the body was designed to look & feel "prosumer" not "godzilla".
The D700 didn't bankrupt Nikon, so why would you suggest such a thing would happen for Canon? If anything, Canon could rest assured that cannibalization is not an issue.
If I understood your post correctly, your suggestion was that Canon shift everything in its model lineup down a segment. Meaning that the 550D would sell at the price of the 1000D, etc. How would they do that without killing their margins?