I don't have a problem with the iPod app. While I like the Zune HD's file management and player better (sans lack of progress bar) the iPhone's iPod app works fine for me. For purely music, I still pop open my Zune HD cuz it sounds better.
But I always have my iPhone on me and it works good enough for me to be happy with it. Lack of crossfade is a kind of annoying, but I can live with it. One thing I would like to point out, when you say iPod, you really mean Classic or Nano. The iPod touch uses basically the same software and hardware, so I was a bit confused at first until you reference your nano.