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The real question is, when will people stop asking for more storage space on their iPhone/iPod touch? As soon as they release one with 128GB capacity, you'll hear people asking for 256GB and 512GB soon after that. Do you really need your entire library with you wherever you go?
This may be a bit old, but I saw this and it irked me. Please do not make your opinions someone else's unreasonable request.

Let me explain...
I want a minimum of a 128gb ipod touch. That is not unreasonable and pretty frankly should have happened by now. Every ipod for the longest time DOUBLED in size with every iteration until the touch came out. They doubled it once or twice and then release 3 or 4 complete iterations without changing the same AT ALL. I'm sorry, but more people are downloading more apps, more music, more videos, more games. These take up valuable space. The touch is supposed to be a one device does it all solution. Well, my music library isn't as big as some, but I have over 1000 CDs. I can hear the difference between lossless and 230AAC. It isn't large, and I don't always "notice it", but I can tell double blind tested.
I personally want lossless on my portable device. O.k., so let's take your theory and get an ipod classic. Not enough space. 160GB? Too small. So, not matter what I do, I need to either cut a serious amount of albums out of my device or use compression. I opted for compression, because the difference in quality is less irritating than me wanting to listen to something and not having it. That leads me to music listening preferences.
I personally listen to what I want to hear at that moment. I rarely do "browsing" or random listening. I know what I want to hear and I pick it out and play it. I might want to listen to Dream Theater and then relax to some George Winston. There is no easy way to know what I'm going to want to hear. As it is with the iPod touch, i ALREADY have run into MANY times where I though "I really want to listen to such-and-such" and I scrolled through only to find it was an album I had to chop off my list because of space limitations. Not to mention I'm not using 320AAC, I'm using 256AAC. I will never go lower than that. I can already tell the difference, but 128AAC is noticeably less quality in most situations.
So, with 128GB ipod I can ALMOST fit all of my music on my iPod using compression. So picking a few albums to drop wouldn't be THAT bad. But then as I purchase new CDs I need to decide which albums to cut out to put the new CD on. This gets old fast, but again, it wouldn't be as bad with 128GB. Now using my iPod touch, about 98% is filled with music. I don't mind that, as it is primarily my music device, however I use the camera as well to make video reviews for youtube. Every time I have to do this I need to remove about 30 CDs of music to make space for a short review video. Then I have to wait a long time to sync the music back up using the on-the-fly conversion in iTunes, which I need to use, otherwise I need to keep two libraries or sets of music (which I used to do) and that takes way too much time to not be worth it anymore now that they have 256 on-the-fly, which will suffice for now.
Then I use apps for financial tracking, voice memos, gotta have angry birds

, writing, utilities, etc. These all take space. Every time I find a game or app I want to try I need to remove at least 3 or 4 CDs to make space, because my iPod is full and syncing doesn't work well with the iPods when it is at or near capacity. Keep in mind the iPod touch is NOT 64GB. It is about 57GB useable. But that leaves about 55 for music, but no wait, it doesn't sync well with less than 1GB free, so that really only leaves 54GB. 10GB? That's a lot of music I had to cut out after expecting at least 60-something GB. So, let's just assume I didn't fill it with music. I don't have any videos on my iPod. Videos can be a few GB EACH. I don't have a lot of games other than angry birds. Some games take up a GB now or more. Most good games are at least a few hundred MB. Don't forget my books and photos and everything else media.
So, what it comes down to is that it isn't big enough. Not everyone shares the same device usage habits and preferences, but as I said I sacrifice videos and other things as it is to have more music. You can say "well get the classic" and I have seriously considered it, but I'd rather not spend another $250, have to manage two devices, sync two devices, charge two devices, etc. I might still do it, but I'd rather just have a 128-256GB touch.
That would:
- give me one device instead of two
- prevent the need to remove items to free space for syncing
- give me more music
- give me more apps, games, etc.
- prevent me from having to remove items to record videos or take photos
- save me money
All that fixed with just a space increase, like they have done with most ipods until recently.
Now my thought is that they want to have people use their cloud services and lock you into that for better or worse. So why would they give people more space if they want to promote the cloud? Unfortunately, the cloud isn't viable for large music libraries (or anything for me personally). There is also the economy and storage costs, which might have an effect. But that doesn't mean you should ask "do you really need that much more music". That would just indicate that they probably would upgrade it if they could afford it. Personally, I'd pay another $100 for a 128GB touch, and I think some others would too. Perhaps they could make them more on-demand so as not to run up manufacturing costs for nothing. Just throw in the custom ssd drive when someone orders it and have it take a bit longer. Or just do what they've always done and step the whole product up like they should.
I don't mean this to sound angry or anything. I'm just trying to illustrate that while you may not listen to music the same way I do, that doesn't mean other people don't have the same desires. You could go back to 2000 when my samsung yepp was 128MB.... yes, MB. I loved it then, but it was a different time and I had to be more selective. I hated that part of it truly, but I liked having any music with me. Before that I carried CDs and a CD player everywhere I went. I could grab 10 CDs in 10 seconds and head out the door. Even itunes isn't that fast.

I already spend way too much time "managing" my music. I want to put it on my device and not ever think of it again. New CD? Rip and sync. Done. I don't want to sync, strategically pick music i "think" i "might" want to listen to tomorrow only to find I don't the next day. Spending hours managing the music.
Anyway, not to get too far off topic, but to answer your question. Do you need your entire library everywhere you go? Maybe not, but at least MOST of it.

Yes, yes I do. haha. In terms of always needing more, well that depends. CDs are still going strong for the most part and the majority of digital downloads are smaller than CD files. Therefore, considering that I have a large library but not as large as some, I think a step or two higher is reasonable for a multi-purpose devices. That would give a lot of music space compressed, or a lot of mixed usage space. For super audiophiles they should always have a music player a step above in quality and space. By now they should easily have a 250GB ipod classic. Even if it doesn't sell as well, it obviously sells enough, as it never goes away. And the price of drives has been dropping. They could throw in a new drive, make new sales and keep the costs possibly exactly the same as they have been.
With either of those two scenarios, I wouldn't need more space for at least 10 years, at which point all of the drive technology should be vastly larger and more affordable and the newer devices should easily match my library needs. If they release higher quality digital audio and eliminate CDs, they should STILL compensate for the larger files by giving people more space in general, so comparatively that wouldn't change anything.
I bet you didn't expect to get such a long response huh? haha -o