I agree, the $50 difference is absurd. It will be interesting to see how sales go.
Keep in mind the great number of people who have between zero and 1000 mp3's total, and the $50 savings would make a difference. Really, there are a huge number of people who don't know what a gigabyte is. There are a lot of people who are just catching on.
Another key market may be Japan... Smaller and cuter is a big deal in that market.