Let's be realistic here. The iPod is Apple's #1 whore. Everyone wants to have a go at her. Thus, it's the biggest money maker. Are they willing to sacrafice that in favor of mergeing it with a phone? If the iPhone indeed turns out to be real, Apple is not going to allow more than 250 songs. Same as the 1g Shuffle. Think about it: what are children going to do with such sophisticated pieces of hardware? Sure, alot of kids today have cell phones, but the main purpose of those phones are for emergency calls and a way of parents tracking their kids. Furthermore, the phone would be marketed towards business users, who are the ones who have the most use for them.
If the phone is real, like I said, it would have limited song capacity, because Apple will not want it to compete with the iPod. So expect the business analysts, psuedo techno-intellectuals and the indie/hipster darlings to raise hell over that.