With the cost and shortage of flash memory at the moment, 16Gb allows Apple to change the form factor, introduce OS X, and incorporate wi-fi for the cost of the higher capacity iphone. It's twice the memory of an iphone, and you don't need to be with AT&T to use it. Not only will the screen appeal to video users, but the wi-fi is gonna be a winner, allowing people to cruise the net as well as listen to music. It's got 8-16x the capacity of a nano, and I'll bet there are plenty of people who'll be happy to have one of those. It's just not as practical if you have 100Gb of music to take with you, but in 3 yrs. the flash ipods will catch up to the current hd ones. Kudos to Apple, I think they did well. I'm getting a 160Gb classic.
Flash memory is being pumped out like nuts, and the price is dropping.