I can see where he is coming from (though I'd bet he wouldn't be saying such if WMA licesned players were doing better), but I'm not sure it will be completly true.
I prefer a small cell phone. I use my cell phone to make calls. Sure, the PDA functionality of some bigger models is interesting, but I don't find myself attracted to any of them. Cell phones also take pictures, but not as good as my Sony T1 camera. And I don't see a cell phone camera with 3x optical and 5 MP any time soon, expecially not in the size of my phone.
Now currently some cell phones are playing with the idea of putting microdrives in them. So that means 6gb of storage in a phone that is still bigger then mine. I don't listen to music on a portable player all the times that I have my cell phone on me. So, that bigger size is now annoyning. And as a music player, it lacks all the music I want with me. I'm figuring I need about 30-40gb to keep me happy. Even my Karma doesn't quite fit that.
Sure, one day I see it happening. Just as one day in the past, portable CD players began replacing portable tape players. But down the road when those changes happen, the iPod will likely have evolved as well. Apple is aready working to license iTunes for phones.
As far as the iPod being mediocre, I can see it being an empeg owner. However, in todays market, it is one of the better products in the portable media space. The Karma and Carbon are nice as well, but the Karma has shown no improvements in a while. And it still lacks one of the empegs big features, hierarchal playlists.
For most people here, there isn't a perfect portable player for us. All due to us having the experience of using the best MP3 player on the market.