Well, Toshiba made it clear their 240GB "iPod drives" wouldn't be ready for mass production until early next year.
Theres no way they'd be able to sell a 160GB iPod for $100 more than the 120GB model.
Even though the 160GB model had more advantages other than capacity, such as better battery life thanks to a bigger battery and more on-board memory (64MB of RAM versus 32MB), theres no way they could justify the price differences between the two if they were to stay at the old $249 and $349 price points.
At $249, this will probably be Apple's most profitable iPod. The components, other than the HDD, are dirt cheap to buy and put together now if they're using the same components they have been for the last year. The software will most likely be the previous generation firmware with an update for the "Genius" features. From a hardware standpoint, they will most likely make more money off of one sale of these than any other iPod. Though the touch will have the potential of "recurring revenue" from App Store sales.
People at this forum need to realize that we here look at things a little differently. If Apple had kept the 160GB model and priced at at $299, most of us here would have thought about what a great deal that was, considering the capacity and extra battery life that model has. But the average person is going to see it differently. They're going to see $269 after taxes (roughly) versus $322 after taxes, as well as a thicker unit that, in their eyes, only offers more capacity. Its more difficult to convince someone to spend more over $300 on something after taxes than a little over $250 after taxes. Just that whole number perception.
Plus the 120GB model offers the best of both worlds. You get higher capacity, but the thinner size and higher reliability of single platter drives.
If Apple doesn't kill off the iPod classic next September, we'll probably see 160GB "thin" and 240GB "thick".
I know I'll be buying a 120GB classic (have 80GB 5.5G currently) around next September. Wait until the event is announced, buy it, leave it in the box in anticipation. If they give a reasonable update, return it and make the choice whether to buy the new one then. If they kill the line, then I have a replacement for when my 80GB dies. Maybe buy 2 even.
I certainly hope they don't kill the iPod classic though. I know it will eventually become a niche product, but I love being able to go in with my 80GB and click "sync all" on every tab in iTunes. I'd have to wait for a 64GB or even 128GB iPod touch for that.