Oh absolutely, I can see that people still prefer that screen size, I'm just surprised that Apple decided not to go with a larger size on the iPod Touch.

But there are other differences. As with the previous generation iPod Touch, they actually cut a lot of subtle corners. Sure, there is some margin in the iPhone related to the cell plan subsidy, but there are some real cost cutting measures in there too. I think a reasonable way to think about it is that with the iPod Touch there is a strong incentive to compromise on the subtle things that users don't notice; the things Jobs always claimed they never compromised on (total fib).

The iPhone 5 vs. iPod Touch 5 was probably the closest the two ever came, the Touch's processor was still running with the 4S's processor/GPU/RAM and the 4's camera, and the body materials weren't equivalent.