I think SiliconAddict has it there, if people are happy enough to listen to lower quality music, why not watch lower quality video? Okay, we all want the best quality video there is, but on a screen that size it isn't an issue.
Taking a seperate issue though, with all these speculations on wild things it might be other than an iPod AV, (still the coolest sounding name I think), any more news on the development of iWork? Is it still coming along nicely and becoming a serious contender to the use of Office for Mac? It would be nice if Steve could announce one or two enhancements between now and June and then when the first Macintels come along, really bill it up as the Mac Office package. That way the average people that are likely to be buying Mac Minis and such would be able to see that the Macs are different to PCs in more than just the operating system. So many still need the hardware differences explained to them and when you have the same processor in each, they could see a different design, different OS and think that it isn't worth the extra money. I'd like to see more apple products aimed at the average consumer, without affecting their core market at the moment.