This is well said. Having wanted a video player, I'm very happy with my Touch (and its non-bad screen, lucky!). So far, it seems to excel for this purpose, which is clearly its intended use.
Now that there's no longer a price difference, if you want a swiss army web widget (more than a video player), get an iPhone and either register or unlock it. If you want video primarily, get a Touch. If you want music, get a Classic. If you want to not spend a lot, get a Nano. Seems to be fairly good market segmentation.
...If the iPhone was still $599, I could see complaining that the Touch isn't "everything but the Phone." But at $399, there are options.
I think you are missing the point. If people wanted to just play video, they would get the iPod Classic.
The iPod Touch was designed to be so much more...but it's not. The problem is Apple doesn't even know what the iPod Touch is supposed to be. It's an in-between device until storage prices come down. It will eventually be the "real" iPod, but for now it's stuck in limbo.