iPod isn't dead. It lives on in the Music app on iPhone, iPad and iPod touch.
But a single-purpose device doesn't cut it any more, not when you have always-on Internet. And I'm not talking about for streaming music. I'm talking about "I have this device in my hand and I can't look up the scores/weather/whatever on it" and "there's a billion or so apps, but this thing can only run one." Paying a couple hundred dollars for a device that can only run a single app. The idea might be retro, but it's very niche and not for basing a multi-billion dollar company's business on.
People have become used to being Internet-connected, and things that don't have an online mode will fall by the wayside (look at Wi-Fi lightbulbs).
If you prefer a single-purpose device, then buy an iPod touch and lock it into Guided Access mode.