I think it is inevitable that Apple will release a video-centric iPod product. I'm not at all concerned about form factor. Apple knows design, and they will get it right [well, for 95% of us, anyway

].
What will drive this train is the software. Right now, even with Handbrake or some of the other utilities, it is a pain [for average folk, not us] and fairly slow [without relatively fast kit] to get video onto a PSP or other PMP player.
Most people I know with iPods get the bulk of their music from ripping their own CD's, then fill in with some downloaded stuff. iTunes makes it really, really easy to rip a disk, and the iTMS makes it equally easy to purchase music.
Yes, we can buy video content from iTMS, so that part is covered, and the library will only continue to expand. To make a video iPod truly mass market, people, and I mean average non-tech-savvy-type people, need to be able to get their home movies into the proper format easily and elegantly. If that method also makes it possible to rip a DVD you already own onto the device, Apple won't advertise or condone that capability in any way.
They could have released this device a year ago. What we need is the software.