I think Apple has forgotten that the beauty of the iPod was "everything in your pocket", and that what pulled them out of the gutter 10 years ago was a new CEO who simplified their product matrix.
Now we've got a tiny little shuffle suitable for party favors, a Nano that's great for people with small libraries but that also supports novelty image and video viewing, the Classic for people who want to carry around pictures and video and the Touch for people who want to look at pictures and video.
Or is the touch for people who want an iPhone but don't want to deal with AT&T?
The battery life arguments I'm seeing are missing the point. They made the thing thinner than the iPhone. If they put the RAM in there to cache the video, the hard drive would barely effect the battery life, and if they thickened the thing up enough to hold the drive, they'd have plenty of space around it for battery.
Despite all the back and forth on these boards about "cannibalizing iPhone sales", they went and stuck the Touch right in the place where it will have the greatest impact on iPhone sales-- it's essentially the same device for $100 less. Why didn't they follow the original argument they made which was that the iPhone was for people who wanted a phone and a Nano in one device?
If they had done that, they could have put a hard drive based Touch out at premium and there would be a natural progression: The Touch for the serious iPod user, the iPhone for convergence freaks, the Nano for mass market, and the Shuffle because it's cute.
Instead they've left me, and it sounds like a lot of people like me, stuck in this place where there are not products that meet my needs.
It's possible that Apple is being overly cautious here and they want to make sure people are still happy without the click wheel, but I don't think that's too likely if you view the iPhone success as a referendum on touch.