Now this is just speculation, but perhaps one of the reasons there hasn't been a video iPod to date is Apple can't nail down the experience.
It's well known that the regular iPods are not the most full-featured music players (they don't have FM radios, microphones, ogg vorbis support etc). iPods are popular because of the UI and the general experience you get while using them. Perhaps this is why the video iPods aren't around yet, Apple can't nail down the user experience.
Seems like everyone wants a magical video iPod, but they don't know what features would be included that other players lack. The belief seem to be "Apple would make it so it would be great". The portable video devices currently available (iRiver, Archos, Creative etc) are quite full-featured, have good screens, and can record directly from tv among other things (like media center integration). But watching video on these devices just isn't realistic, much like trying to watch video on a cell phone. They just don't have that "pack it and go" ability like a regular music player does. I believe the "iPod with video" is totally a stop-gap measure.
I realize there are a number of other issues (DRM, content, battery and a whole host of others), but I believe that it's the user experience that's holding this highly anticipated product back.

Chowhound
Comic Vine
GameFAQs
GameSpot
Giant Bomb
TechRepublic