The idea that 32 gigs of flash is undoable is complete nonsense, no offense. Ars Technica had an article from March of this year in which they were talking about the possibility of a really thin/small Macbook with flash and how at the time, 32 gigs of flash was around $160. $160/2 = $80. Assuming that there is a discount the higher the volume, then let's say 16 gigs is $90. That is still pretty cheap. No, the thing that is hitting people's wallets here is the touchscreen plus all the unnecessary PDA functions. And yes, they are unnecessary. It's an iPod, not a PDA but it looks like Apple is turning it into a PDA. The thing is loaded with PDA features, but lacks the thing needed for a media player: storage capacity.
Apple could have gone with 32 gig and 16 gig players, but one of the reasons they didn't is to avoid killing the iPhone off so soon. If they released 16 and 32 gig iPods with the same features as the iPhone, then suddenly a top of the line iPhone has half the storage of the low-end iPod and a quarter of the high-end iPod. Assuming 16 gigs is $80-90, then that tells you how much of a mark-up Apple is charging over the actual production costs with a $400 pricetag. Oh well though, eventually the prices will come down just like with the hard drive based iPods and Apple will work out the kinks. Hopefully within a year or two, we'll have a mature iPod Touch with at least 80 gigs of storage.