the biggest problem with taking out the ipod is winning the kids over. zune didn't do it, none of the other mp3 devices did it, so far android hasnt done it (for phones maybe, but not music and media players). at the moment i think if someone were to make an ipod touch sized android device specifically geared towards media, and improve the menu layout, settings layout, and smoothen out the ui in general, then maybe they would have a small chance.
They also need to put some money towards advertising it (which is why nobody has heard anything about the android tablet), show off things ipod users dont have (animated wallpapers, swype, widgets, customization etc)
Basically they need to take everything current ipods have, and build on it, then win the kids over. not a small challenge for any company.