err, this would be a pretty serious thread to iphone (and thus the entire ipod brand)
The Zune is a decent player and has attracted good reviews and interest from PC tech heads. It is also only their first attempt, MS showed with the xbox that they are willing to throw money at a market to establish themselves in the long term. They have also showed that they can develop hardware in a very short space of time regardless of cost.
The iPhone looks like an amazing piece of kit, but it has deal breaking flaws for many people:
No 3G (yet)
Only 4-8 GB storage
VERY expensive
Locked to one network
For a Zune phone to be a threat it wouldn't need to have all the amazing iPhone features, it could simply be an MP3/Video Player capable of making calls and sending e-mails with a 20-30 GB capacity and lower price.
Should they go the whole hog and make a PDA phone, they would be able to call upon all the experience they have in the mobile software business already.
Bitch all you want about idea stealing but you must never underestimate MS.
For me capacity and price are the biggest problem with the iPhone. Apple will surely have to broaden the iPhone line to appeal to average customers. An iPhone nano seems like an obvious move.
How much storage do MOST phones in general have? Even some of the more expensive ones don't carry much over 1-2GB without the aid of a separate flash card. Why would anyone want an HDD-based phone? The 1.8" HDD would seriously add heft to the phone, not to mention be a battery pig. 8GB is a very generous offering for a phone, and being flash based saves lots more juice.
Anyway, MS will just be following the same pattern that it's started with the Zune, first establish a steady relationship with the third-party, then suddenly come out with your own product to turn around and bite them in the ass, just like they did to PlayforSure with their DRM. Typical.