The iPod was a struggling niche-market luxury when the accessory flood started. Take a look a the PDA market as well. Many accessories offer but a standard fit, not a custom one. Having a simple shape helps to get the ball rolling.

On the subject of form factor above, I didn't suggest a radical change to shape or function. Dropping the scroll wheel in favor of a non-mechanical way to achieve the same goal would have numerous benefits. Take a look at the touch-sensitive scrolly-thing on the new Creative Zen. Further, the Karma is not square. Well, it is, but it has a bulging tumor to hold the scroll wheel. I suggest making it a symmetrical rectangle. One that is close to the current overall dimensions sans tumor. Practically square.

There's only one product to gun after in this market segment (higher-end MP3 player) - and that's the iPod. I'm not even suggesting they can be beat until the application changes drastically. That's why I gave only simple suggestions, which I believe are quite solid. The next step is definitely bringing color and additional media into the mix (primarily video, but likely also still photographs).

Bruno