The real iPod killer was the iPhone . They disrupted themselves and usually companies don't want to do that .
I'm aware this is probably a fairly small market, but it's gotta be bigger than whoever's buying the current pricey Nano with its crappy faux-iOS touch interface.
Heck, lots of people given up on compact cameras, where phones are still (and will be for the foreseeable future) subpar in quality, and they will carry another device just for music that doesn't really add anything?