It's quite obvious. There's more to it that doesn't need to be said.
If you put a video camera, camera, FM radio, pedometer all into the iPod Touch, and if you actually gave it 16gb of RAM at $199 which they most likely could, and they most likely could make it the 50% faster model at that price point as well and maintain profit margin, well there's a problem:
The iPod Nano market disappears, and encroaches too much on the iPhone. They need to distinguish their line up. I think it's as much of a business move as anything.
The ultimate destination of this is an "iTouch" which is probably what the name will transform into eventually. It will be an iPod Touch with a phone app that works over 4g/wi-max. People will not pay for a cell phone carrier, rather a data carrier such as CLEAR and get wimax. The iPhone will be obsolete. The iTouch will have everything and do everything.