I really hope the iPod doesn't go down the line of convergence/frankenstein/jack-of-all-trades-master-of-none. It's a solid music player and it's main priority should be as such.
Why do you assume that because a hypothetical MYLO iPod would be able to play videos, IM and go on the net that somehow itunes would be any worse than it already is?
The MP3 market has been saturated for a while now. There's only so much you can do in it, and so much you can do to improve listening to music. I'm on a 4G iPod, and have not been inclined in the slightest to upgrade to either a photo or a video iPod because my music will sound exactly the same on both and the extras they offer simply aren't up to scratch. Apple have done pretty much all they can with listening to music, except perhaps music sharing via WiFi (which very few will use anyway). If they don't move forward and innovate iPod sales will stagnate, people who want one will have already bought one and with no new features worth mentioning why would they buy a new one that will make minimal difference to what they can do with their iPod? I can already listen to music on my current iPod, if Apple want me to upgrade they'll have to offer something much more. The same is true of the majority of iPod users.
The reason the iPod is the success it is today is because it revolutionised the market before it was established. They have to opportunity to do the same here with the kind of device MYLO hints is possible. Or they can do what you are proposing and offer nothing new and fall behind their competitors.
In my experience with work colleagues and parents/in-laws the iPod is almost bordering on being too difficult as it is just with just music and video.
Technophobes are a rare beast these days, and will become even rarer in the future. If they can use a computer, which is many many times more complicated than an iPod or MYLO, then I don't see the problem. The whole "lets not make things complicated" drive actually pisses me off because computers are so damn easy to use today. Of course, I'm very doubtful that technophobes are the primary market for iPods anyway.
Adding slide-out keyboards, larger/deeper navigation menus, wifi connections, and email configuration would probably push it over the edge as far as being too technologically intimidating for most.
Just like the mobile phone market, right? Adding cameras, bluetooth, large navigation menus, email, games, internet has really put a dent in mobile phone sales. People want mobile phones that do nothing but phone, not frankenstien-jack-of-all-trades devices.
Not to mention the size sacrifice.
I would imagine a MYLO iPod would be about the size of a 4G iPod, taking into acount the added thinkness due to the slide out keyboard. That size is more than small enough to fit in pretty much every pocket and fits nicely in your hand, so is there a need for it to be any smaller?
Apple may bring something else to the market to compete if there really is a decent market for devices like the Mylo (which I'm personally not too sure there is).
Devices like the MYLO are the only possible evolution of the MP3-player market. In 10 years stand-alone devices like the iPod will be dead. Why have a Batman-esque utility belt of gadgets when you can have one do it all (and just as well)?
I sincerely hope you're wrong about apple's thinking on this. The iPod should be a pure machine. Maybe a few add-ons, improvements, limited added functionality over time - but it's an MP3 player. The best there is. Don't F with that.
If Apple do that then iPod sales will die whenever their competitors are offer all the other services along with an MP3 player. Apple isn't about conservatisim and playing it safe, the reason the iPod was a success was precisely the opposite: innovation.
"Pure" machines are a dying breed, there are very few around these days. Consoles, computers and mobile phones have all shown that the more you offer the better you sell and that "pure" machines are soon to be extinct.
And apb3, what you're describing in the chocolate and PSP is NOT a QWERTY keyboard. Look at the youtube video of the MYLO.