Actually, a standard PocketPC could be as good as an iPod as a media player if it weren't for one thing - storage. The largest SD and MiniSD cards for PDA's are 2gb. There are some 4gb too, but they do not always work in every PDA with every card. That's just not enough to hold applications, data and media without switching multiple cards - an annoying proposition.
The largest iPod on the other hand have 60gb hard drives, which can hold just about every song, video file and audiobook in most people's collections.
Here's an idea. Take a standard PocketPC or Smartphone with WM5, jam a 30gb or 60gb hard drive in it and develop an iPod-like front end software that can easily control all sorts of media formats. Then pair it with a music store desktop software like iTunes. And because its also a PocketPC, you could still run all your apps and personal data since the front end software is just that, a program that is running on a standard PPC instead of a standalone OS like iPod. Its sort of like what Garmin and others are doing with these PocketPC/GPS hybrid devices.
The only drawback is price. I'm sure MS wants $100-$300 devices, not $600 ones. Plus, many people want just media players, not a full PPC. But it would still be cool.
I'd buy one of those media players in a second
Its not a perfect solution, but my point is, storage is the issue, not necessarily hardware.