In my opinion, MS doesn't try to be "culturally radical" or to appeal to the "youth culture". Instead, they're simply trying to say: Ours can do what the iPod can - at the same price but with more features. Others sure have tried and failed, but Microsoft certainly has the money to throw at such a project. They might not even _want_ to overthrow the iPod. Just eat enough market share to become profitable at some point in the future. Right now, there isn't _one_ alternative to the iPod. MS thinks iPod is the Coke in need of a Pepsi. And they're probably right. Apple isn't really innovating on the iPod front right now. They're milking a cash cow instead. (Rightfully, in my opinion.)
In order to stay on top, Apple will probably _have_ to add some or other feature to the iPod line in the future, if Zune takes a bite of the market. Right now, Apple's in a "safe" position. They don't _have to_ deliver a "real" iPhone. Because for most iPod customers, no competitor can match the ease of use of iTunes/iPod. So even if a phone comes out with great music support (and quite a few already have, I own a Sony Walkman phone which is great, actually, but doesn't make me want to sell my iPod...), Apple obviously has time to watch the market.
Same for the "real video iPod". Apple watched as "Personal Media Centers" came out. Obviously, those didn't do that great. (There wasn't really _the_ medium you needed on-the-go.) So Apple took advantage of podcasting and video-podcasting. It only gave the iPod the video capabilities it needed. Seriously: 320x240 isn't _that_ great a resolution for portable video. But certainly enough for the occasional music video or the video-podcasts right now.
Of course, Apple themselves are now trying to create the need for a "real" video iPod, i.e. one with a wide screen and higher resolution. By introducing movies to the iTunes Store. I'm not convinced yet that this will really take off. I've still got a couple of hundred DVDs that I'm willing to convert myself to a format for a "real" video iPod. I certainly won't convert them to 320*x, though.