The idea that Apple can just slap the iPod brand on a low-capacity, low-cost player and “make it work” is backwards. The iPod isn’t popular because it’s cool — it’s cool because it’s so well-designed.
Demand for lower-cost iPods exists. But, duh, demand for lower-cost everything exists. Perhaps you’d like to see a $15,000 BMW 3-series model, but you’re not going to get one.
[UPDATE] I insterted cheap in the title. I think this matches it closer.