Give the new iPod Nano a chance!
There are so many people hurt by the fact that Apple didn't upgrade the Nano to continue its form as a watch, to the point that all the negative reviews are either about this, or of its unneeded existence in a cloud filled world.
Get over it.
I have an iPhone 4, I had the original. Yes, the thing can store music, but it can also store pictures and apps. I usually take about 3GB worth of pictures every month, and have about 8GB of apps and data, by that time there isn't any room to keep a reasonable music collection, especially when you think about all the podcasts and iTunes U content I have.
I have a really, REALLY hard time with my iPhone because of this. I'm always in the middle of nowhere downloading something, and then I'll get a low space message and have to delete stuff then and there. Sure, I could get the bigger sized option, but I'd only have the same issue because I'd only be storing MORE media on it and having the same issues with apps not fitting since I tend to download apps and content in the 1GB range.
Having 16GB dedicated solely to MEDIA is a fantastic idea. It's not great for someone who absolutely must have EVERYTHING on their device, but it's good for those who have phones that are already filled to the brim with other stuff.
And obviously, since I have an iPhone, an additional investment into an iPod Touch wouldn't be worthwhile, even for the bigger screen. I already have a device that does the same exact thing, so what's the point?
I think people need to remember that this is only the first version of the firmware, things could change in the next few months. Having a calendar app, weather app, and other small Dashboard-like tiny apps that get updated everytime you sync could very well show up in updates now that the screen is much bigger.
And who knows? Maybe someone will show up with a few hacks. It's still too early to dismiss it as a rip-off though.