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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?
 
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".
Who cares what it looks like. The integration of such an advanced AF system to a full frame camera has been done before by Canon (e. g. the EOS-3's 45 point AF) and Nikon (D700), so it is technologically possible. Even if Canon had felt that this is too challenging for the Mark I, they certainly could have adopted a more advanced AF into the Mark II.
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?
You misunderstood: I meant that Canon should have repositioned their line-up: the x0D were one of the advantages, because they were quite a bit cheaper than Nikon's Dx00 series and better specced than the D80/D90. In fact, I think Nikon's D7000 was intended to be the answer to the x0D series.

The 60D could have been positioned as a direct competitor to the D90 (much better viewfinder than the 550D and 1000D, plastic body, but a step up from the smaller models, better AF, etc.). Canon has a history of pushing older models down which are sold alongside their upgrades as cheaper models (e. g. the 550D pushed the 500D down a notch and Canon keeps on selling it, ditto for the 450D when the 500D came out). So depending on the economics, Canon could have replaced the 550D with the `600D' or pushed it down. At least in case of earlier triple-digit Canons, it seems to make financial sense to the company and it would seem like a logical continuation of Canon's product policy.
 
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