Engadget had an interview with Apple's Phil Schiller, this guy is Senior Vice President of the firm's Worldwide Product Marketing.
Well, the touch now has more storage, sans the phone. I mean it's basically exactly the same device. It has all of the same media software and has the browser and YouTube and all that. So why is the iPhone now still the best iPod?
Because it also has the phone. So you get the internet device and an iPod and a phone all in one thing. So you're right. Its not that it can do anything more than an iPod, except that you can certainly do your internet surfing also on the cellular network in addition to WiFi -- so that you have that part of it. It does a little bit more in terms of an internet device because of that access and it has a phone and both they are both as capable in terms of iPods. So, for that reason it's still the top of the line. But if your focus is primarily a touch iPod then sure we have something that's just as good and has added benefit of being amazingly thin. Look at the thinness.