I love my iPod, no doubt about it. It's the first device where I've gone two years without seeing a feature I'd want to add. More space? Eh, I have 5000 songs now. Longer battery life? Sure, but I've seldom been in a situation where it's been a problem. Shuffle? Ok, yeah, I bought one and quickly found out that I use the two devices very differently. A shuffle is like a personal radio station - turn it on and listen - where the normal iPod is a real choice/player.
So would I switch? This device is the first one that's made me seriously consider it. It would take about a month to change all my music from AAC format to MP3 and I'd lose some quality, but I think I could live with that. My pocket space wouldn't change appreciably and I'd add a function, one I already use and love. If they price it right AND get the usability in the iPod's ballpark, I'll certainly have to consider it.
Apple, it's your move.
**UPDATE** I spoke to soon. The gang at Engadget note that this device isn't a pocket-spacesaver. It's XM enabled, meaning you still need to have an extra tuner and antenna attached. That isn't enough, at least for me. Combine my iPod and a MyFi with better reception and we've got a deal.