Reasoning - I'll give it to you straight then:
1) Everyone needs a phone.
2) No one needs to carry duplicative devices, especially not men (we do not carry bags like women).
Thus A) These two statements make the Ipod Touch a redundant device.
OK, say you like redundancy.
Let's see what remains that it can do:
1) Music
2) Video
3) Gaming
4) Apps
1) - It's huge for a dedicated MP3 player. It's limited for storage for it's size.
2) - Video is adequate, yet falls short of something like the Zune HD. Like HD short.
3) - Playstations can do the above, and play developed bonafide games
4) - What kind of killer apps do you need, that a dedicated device... like say a translator can't do better?
I simply can't imagine any worthwhile application that operates properly without OTA data (aka NOT WiFi).
Thus, 2) It's outclassed in every single way
Alright, say you're OK with a redundant and outclassed device. What's left?
3) It's nice, thin, and sexy with great build quality and a fruit logo.
Alright, I'll give you that one. That's definitely worth dropping a couple of $hundred dollars on. If consumers realize #1 and #2, they must be buying it for #3.
And yes, I find #3 hilarious for the price of the device.
1: True, but not everyone wants/needs a smartphone
2: I carry duplicative devices, I have my dumbphone, my iPod, my iPhone (unactivated, so it is an iPod Touch), and my laptop most places. The iPod remains almost solely in my car, so even if I had an iPhone/Android that could make calls, I would still keep a dedicated music player.
3: All true, but honestly, how is the fruit logo any different from the Sony logo that keeps people buying their TVs instead of someone else's? Brand recognition and loyalty are vital to a company.
As for what it is good for...
1: Yes, it is large for a dedicated music player, but it isn't any larger than an iPod Classic, and the iPod Classic has its own shortcomings (no wifi, smaller screen, overkill capacity for those like me)
2: The ZuneHD has a similar resolution to the iPod Touch, so the HD part is only useful if you are hooking it up to a TV which I mean, honestly now, how many people do you really think do that? How many carry the player, plus the cable, with them? How many would just use their laptop?
3: If you mean the PSP when you say playstations (the only playstation I know of with a built in battery and screen) then you are correct, it is probably better as a dedicated game player, but it falls short in every other regard, and now you are hauling around a dreaded duplicative device.
4: Stand alone dictionary, stand alone calculator, stand alone email device, stand alone web device, stand alone game device, stand alone music player, stand alone dictionary, stand alone e-reader, stand alone video player, stand alone recipe catalog, et al. Yes, they very possibly do their individual jobs better than the iPod Touch, BUT you HATE duplicative devices.
YOU cannot imagine a useful application that doesn't need constant connection... how about a pill database for doctors? How about the entirety of Gray's Anatomy? How about Bar preparation materials? How about a windage calculator for marksmen?
Again, just because you think it is an extravagance that doesn't fill a need doesn't mean that it doesn't. And with something like 30 million devices sold, I find it hard to believe that every single one of them was duped into buying something shiny.