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A lower-cost Nano makes sense, but I still think Apple will have something (a Shuffle or replacement) at the VERY low-end, sub-$100, below the Nano.
 
I own a Shuffle and have used my friend's iPod Photo, and I do prefer the shuffle. While the Nano has the same "throw it in your pocket and forget about it" form factor, I prefer the durability and ease of use of my Shuffle. it would be nice to be able to rate songs and see titles, but aside from that and price I can't think how it could be improved. I see these rumours as a bit unsettling for that reason, but then again I can't see needing to replace my Shuffle any time soon so I guess I shouldn't care.

and for those who think durability isn't important: I've dropped my Shuffle on hard pavement around half a dozen times, with no appreciable damage to the finish. the thing is built like a tank, and sexy.
 
I think the current iPod line-up is great. It covers all areas, $70-$400 and 512mb-60gb.

Maybe Apple will drop the 1gb shuffle and just keep the 512 shuffle and the 1gb Nano.
 
The shuffle is just too practical, I'd hate to see it go. However, if the nano-replacment can hold up in terms of being light enough and durable enough (while having more space) I suppose I shouldn't worry.
 
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